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Reality Bites? Canopy Growth Corp (TSX:WEED) Is Among Canadian Marijuana Stocks to Feel Pressure After Legalization

Karen Thomas, CFA
pot, marijuana

Canopy Growth (TSX:WEED)(NYSE:CGC) was down 6.85%, Aurora Cannabis (TSX:ACB) was down 7.23%, and Aphria (TSX:APH) was down 6.08% on the day before legalization.

At the time of writing, it is the day of legalization — the day this massive market is officially opened and when the sale of marijuana begins to be taken away from the black market.

As a reflection of the volatility and the risk that is still inherent in marijuana stocks, let’s look at what is happening in the market.

Marijuana stocks opened down big on the first day of legalization, and, as of midday, they have begun to come back a bit. There is no question that the marijuana market is big, with estimates ranging from $8 billion to $10 billion in Canada alone. The questions lie in the implementation of the business, strategies, profitability potential, and in the valuations of marijuana stocks.

I mean, when a stock is reflecting everything positive that could happen, and when the stock is assuming things will move ahead without a setback and at a feverish pace to the finish line, we usually have a problem.

Sell on news?

If you have not heard of this investing advice, it is pretty much self-explanatory.

Very often, investors bid up stock prices in anticipation of a positive event, focusing only on the positives. When the event is actually announced, reality sets in and investors begin to take a more realistic view of things, traders exit their positions, and the stock falters.

I think investors may stop looking at marijuana stocks with rose-coloured glasses, and valuations will come back down to reality.

Now it gets interesting.

I don’t want to bet on sentiment and I don’t want to participate in a gamble. I want my investments to make sense from a risk/reward perspective. I want the stocks I buy to have some real numbers and real financials behind them and I want to be able to sleep at night.

Canopy Growth stock is clearly still the leader and the stock I will be watching most closely.

With 12 facilities, supply agreements with all provinces, and the Constellation deal backing them, this stock represents the lower-risk stock of the marijuana stocks.

While Canopy’s most recent $425 million acquisition of Ebbu, a Colorado-based hemp researcher, was a good strategic move, this comes with dilution to current shareholders, as the company will issue 6.2 million shares (2.7% of shares outstanding) to pay for it.

In its latest quarter, Canopy reported year-over-year revenue growth of 63%, sequential revenue growth of 14%, and a net loss per share of $0.40. The stock is trading at a price-to-sales multiple of 169 times.

Aurora Cannabis reported a 223% year-over-year increase in revenue and a 19% sequential increase in its latest quarter. Aurora Cannabis stock is trading at a price-to-sales multiple of 237 times.

And lastly, Aphria reported a year-over-year revenue increase of 117% and a 10% sequential increase. Aphria stock trades at a price-to-sales multiple of 107 times.

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Fool contributor Karen Thomas has no position in any of the stocks mentioned.