At midnight on Wednesday, a marijuana dispensary in Newfoundland, Canada sold the nation’s first gram of legal recreational cannabis.

And as the skunky cloud emanated across the country, marijuana enthusiasts celebrated, saying, ‘This is awesome. I’ve been waiting my whole life for this…’

‘I don’t need to be a criminal anymore, and that’s a great feeling.’

Canopy Growth’s CEO, Bruce Linton, said, ‘It was extremely emotional. Several people who work for us have been working on this for their entire adult life and several of them were in tears.’

Perhaps even more revolutionary is the retroactive criminal implication…which PM Trudeau has stated will mean pardoning those convicted of possessing up to 30g of marijuana.

In doing so, Canada has become the second country in the world to legalise recreational marijuana, following Uruguay’s example.

Here at Money Morning New Zealand, we’ve been closely following the story from an investor’s perspective.

We knew the demand was there…and that several large producers have been gearing up for years now…

It felt like floodwaters building up behind a retaining wall, poised to burst through the brace.

For us, it wasn’t the product that interested us. It was the fact that a flick of Justin Trudeau’s pen would spawn a brand-new — potentially multibillion-dollar — industry.

And that investors like you and I could buy tickets for the ride before the doors opened.

 

Putting the ‘blazing’ in ‘trailblazing’

Folks in our network recommended buying shares in Canopy Growth, Tilray, Inc. and Aurora Cannabis ages ago. Even before they went public.

And since their IPOs, it’s been a steep shot to the moon…

  • Tilray [NASDAQ:TLRY] has increased sevenfold since launching in July.
  • Canopy [NYSE:CGC] has roughly doubled since January.
  • Aurora [TO:ACB] went from about US$2.25 two years ago to over $13 per share today.

All in anticipation of the prohibition lifting…

When that happened Wednesday evening, what did investors do?

They sold out.

That’s right. In the hours following the legalisation, cannabis stocks plunged.

  • Tilray down 6.4%
  • Canopy down 4.4%
  • Aurora down 2.9%

Huh?

What would trigger the stocks to crash?

It’s not sales. If anything, the rush on dispensaries has been greater than expected.

It’s not public perception. The general consensus of the event has been celebration.

It’s not company-related. The fallout was widespread across nearly all pot stocks.

So, what caused the mass exodus?

Maybe investors cashed in so they could hit up the dispensary themselves…

…turning their shares of CGC into a little THC…

Kidding. I believe the sell-off was because of inexperienced speculators looking for short-term gains.

The type of people who bought a month ago because their cousin told them to…and have watched the ticker every day since. Then when some of them decided to cash in, it caused the rest of the herd to gallop off the cliff.

We knew that the whole sector was saturated with these kinds of gamblers.

It severely skewed investor returns and turned the market potential into a well-inflated bubble.

And what we’ve experienced this week is that bubble deflating with a high-pitched whine… [openx slug=inpost]

 

A ‘blunt’ reality

The run-up to Canada legalisation has been swamped by mania…and is in dire need of a normalising correction.

I believe we’ll see this corrective movement continue over the coming weeks.

‘But, Taylor, you said your colleagues recommended these companies. They must be scraping the egg off their faces now, huh?’

Not at all.

You see, my colleagues’ recommendations are backed by in-depth research…with fundamental reasoning…and quantitative evidence.

They recommended Tilray, Canopy and Aurora because they predict that these companies will continue to lead the charge in this new industry for years to come.

And that prediction may very well come true…as soon as the gamblers step out of the picture.

In other words, these pot stocks were solid opportunities a while back, and have some room to deflate before getting back on track.

Most of your talking heads will disagree. So will most of your mainstream fund managers.

The generation consensus of the mainstream to this point has been very bearish on the cannabis market.

They’ve compared it to bitcoin or tulipomania.

It’s too new and too risky for most folks to put their reputation on the line and recommend it.

It’s a whole lot safer to say, ‘Ignore it. Keep investing in Westpac and Telstra.’

Or even worse: ‘Put it in property.’

And, frankly, I understand where they’re coming from. Tall poppy syndrome exists in the financial world, too.

But I also believe that ignoring the immense potential this market offers is irresponsible.

Dismissing it because it’s new is a mistake.

Do your research. Run the numbers. See how these companies stack up.

If it helps, ignore the fact that the product is cannabis. Imagine they’re selling something trite like gravel.

Then once you’ve taken an unbiased view of the company and industry, you’re ready to make a decision on whether it’s worth investing in.

In our research, we’ve concluded that the potential in the industry is real and could offer incredible returns. At the same time, the tsunami of speculators has destabilised the market…and that’s leading us to be a bit more cautious.

It’s an exciting game, but maybe it makes sense to watch this one from the sidelines.

Best,
Taylor Kee
Editor, Money Morning New Zealand

PS: While Canada’s marijuana market is on a wild roller coaster, New Zealand’s is just being born. In fact, the Kiwi market today could be a bit like Canada’s a year ago…back when stocks were fundamentally sound. You can bet your bottom dollar that we’ll be watching New Zealand’s cannabis scene with a careful eye…so readers like you can hear about any opportunity before it goes mainstream.