Pot Stocks: Uncertainty Is the Only Certainty

Canopy Growth Corp.(TSX:WEED)(NYSE:CGC) posted disappointing earnings. Investors best be prepared as uncertainty is the only certainty the pot sector.

| More on:
This past week, Canopy Growth Corp. (TSX:WEED)(NYSE:CGC) posted disappointing earnings. The company missed analysts’ estimates on both the top and bottom lines by a significant margin. Analysts were expecting Canopy to post a loss of $0.08 per share, but it posted a loss of $0.31 per share.  Ouch.
 
Although revenues increased 55% year-over-year, the company missed expectations by approximately 6% or $1.39 million. On Wednesday, the day it announced earnings, Canopy lost approximately 8% of its value. Investors were in full-blown panic mode. How could the company post such poor earnings? Is this a harbinger of things to come?
 
Canopy’s earnings dragged the entire pot sector down. Time to run for the hills? Not a chance. Canopy more than rebounded the following day. In fact, the company’s share price is now up 3% over where it was before it announced fourth quarter results.
 
There is an important lesson to be learned from Canopy’s earnings. Investors who are invested in the pot sector should expect volatility over the next year.
 
Analyst estimates
 
If you’ve been following the sector, one thing is abundantly clear: analysts have no idea how to value these companies. It’s no fault of their own; the pot sector is speculative and is undergoing significant consolidation. Companies are expanding capacity at a blistering pace as they try to catch up to the expected demand. The result? Extra costs. As such, it is difficult to predict earnings.
 
What does this mean for you? Take the estimates with a grain of salt. Until pot stocks start booking revenues and profits against recreational marijuana, it will be very difficult to value these companies. Canopy Growth has an $8 billion market cap, which is tops in the industry. Is this too high of a valuation? I can’t say.
 
The size of the recreational marijuana market in Canada is tagged to be anywhere between $4 and $9 billion. This is a wide range. The problem is, no one can accurately predict how big the market will be. At this point, they are all guesstimates.
 
Speculative buy
 
At this point, an investment in the sector is a speculative buy. Don’t agree? Investors are betting on a market of unknown size and demand. Estimates vary widely and the future is full of uncertainty. Case in point: the Province of Ontario is already demanding that suppliers cut prices so that it can compete with the black market.
 
I have confidence in the sector. However, I am not naive enough to think that there is no risk involved. If you are risk averse or can’t handle the roller coaster ride, best to stay on the sidelines.
 
To quote John Allen Pollos, “Uncertainty is the only certainty there is, and knowing how to live with insecurity is the only security.”

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Mat Litalien has no position in any of the companies listed.   

More on Investing

investment research
Dividend Stocks

Best Stock to Buy Right Now: TD Bank vs Manulife Financial?

TD and Manulife can both be interesting stock picks for today, depending on your investment style.

Read more »

A worker gives a business presentation.
Dividend Stocks

2 Dividend Stocks to Double Up on Right Now

These stocks are out of favour but could deliver nice returns over the coming years.

Read more »

Man holds Canadian dollars in differing amounts
Dividend Stocks

This 5.5 Percent Dividend Stock Pays Cash Every Month

This defensive retail REIT could be your ticket to high monthly income.

Read more »

Confused person shrugging
Dividend Stocks

Passive Income: How Much Do You Need to Invest to Make $600 Per Month?

Do you want passive income coming in every single month? Here's how to make it and a top dividend ETF…

Read more »

Canadian Dollars bills
Dividend Stocks

3 Monthly-Paying Dividend Stocks to Boost Your Passive Income

Given their healthy cash flows and high yields, these three monthly-paying dividend stocks could boost your passive income.

Read more »

ways to boost income
Investing

Are Telus and BCE Stocks a Smart Buy for Canadian Investors?

Telus (TSX:T) and BCE (TSX:BCE) have massive dividend yields, but their shares have been quite sluggish!

Read more »

investment research
Tech Stocks

Is OpenText Stock a Buy, Sell, or Hold for 2025?

Is OpenText stock poised for a 2025 comeback? AI ambitions, a 3.8% yield, and cash flow power make it a…

Read more »

Make a choice, path to success, sign
Dividend Stocks

The TFSA Blueprint to Generate $3,695.48 in Yearly Passive Income

The blueprint to generate yearly passive income in a TFSA is to maximize the contribution limits.

Read more »