After seeing the wild swings in the share price of Tilray Inc. (NASDAQ:TLRY) last week, there is a little doubt left to conclude that marijuana stocks are in bubble territory and investors should make their moves with extreme caution.
Within five trading days, Tilray stock took investors to one of the wildest rides one can imagine. Shares in the Nanaimo, British Columbia-based weed company, had more than doubled by Wednesday on the news that the U.S. Drug Enforcement Administration approved Tilray’s plan to import a medical cannabis product.
But this mind-boggling reaction to just a regulatory development proved very short-lived; the shares wiped out that gain within an hour.
By the end of the trading week on Friday, Tilray stock was trading at $123 a share after reaching $263.34 on Sept. 19.
Crash in pot stocks can’t be ruled out
This level of volatility shows that the gains in pot stocks are driven by speculators, and a crash in their share values is very much a possibility.
Despite last week’s terrible ending, Tilray stock is still up 623% since going public in July. The stock that listed on the Nasdaq instead of the Toronto Stock Exchange quickly became the darling of U.S.-based speculative traders.
Its $11.45 billion market cap is just behind the largest weed producer Canopy Growth Corp.’s (TSX:WEED)(NYSE:CGC) that commands $14.37 billion in market cap.
The latest investors frenzy to invest in pot stock triggered by Constellation Brands Inc (NYSE:STZ) (NYSE:STZ) the maker of Corona beer, announcement last month that it is investing $3.8 billion in Canopy to boost its stake in Canadian grower ahead of the scheduled legalization of recreational pot use in October.
The world’s leading alcohol beverage company sees a global opportunity in Canopy, which is benefiting from the growing use of marijuana for both medical and recreational purposes in the developed world.
Despite a favorable regulatory environment and a traction that weed producers are getting these days, the sector is still in its nascent stage and far from achieving meaningful profitability.
Tilray, for example, made $9.7 million sales in June quarter and produced a loss of l$12.8 million during that period. Its $11.4 billion market cap, however, is higher than Alcoa (NYSE:AA) Corp., which made $11.6 billion in sales last year.
If you’re an investor seeking high returns, I don’t think this is the right time to jump in and buy pot stocks. The market has become attractive for short-sellers, and there is a growing chance of sector-wide correction.
Bottom line
Going forward, however, buying a couple of quality marijuana stocks won’t be a bad idea once the dust is settled. But in this space, I would advise to stick with the biggest names, which have the capacity to perform in a market that’s still in its infancy.
Among the top names, I like Canopy Growth due to the company’s leading market position. Canopy is ideally positioned to take advantage of the anticipated demand boom from recreational pot users.
Fool contributor Haris Anwar has no position in the companies mentioned.