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The shrill marketing pitch of financial websites like Finanztrends.info and others is ear-piercing these days: “Mega-trend cannabis – your shares are up for the year 2019,” states Bull Markets Media not quite truthfully, offering “The top cannabis stock for the New Year”.

A year ago I reported about Malta stepping to the frontline of a world-wide move into cannabis production. Initially focused on medical cannabis, these new businesses are hoping to also soon cover the vastly more voluminous markets of recreational drug consumption.

After the legalisation of pot-smoking in Canada and 11 US states, hopes were high that marijuana – containing active substances with health benefits for Alzheimer’s, epilepsy, Parkinson’s, chronic pain and some mental disorders – would soon expand into the recreational market too. Enterprises like Aphria, also active in Malta, Aurora and Canopy Growth, many of them listed on the NYSE and Toronto stock exchanges, boast multi-million dollar valuations, some of them better capitalised than long-established stocks.

Supported by market analysts, which all predicted growth rates exceeding 30 per cent per annum for the foreseeable future, these listed stocks showed stock market gains of a few hundred per-cent in a very short time. Grand View Research predicted a marijuana market of $66.3 billion for the end of 2025, and Fortune Business Insights forecast sales volumes to grow from 10.6 billion in 2018 to 97.35 billion in 2026. Investing seemed fool-proof.

I had cautioned in my report against such unbridled optimism, pointing out that the legalisation of cannabis for recreational use in other countries was less than certain and that even in markets where smoking pot had recently been legalised, the imposition of new restrictions could be expected once health implications of drug consumption were better understood. I warned against investing too much trust into the capabilities of enthusiastic yet inexperienced entrepreneurs who may lack financial savviness. I saw risks of financial overstretch, marketing failures and regulatory pitfalls, with new legislation open to divergent interpretation. Optimism in an industry which had not turned in any solid profits yet looked to me like investing in We Work, Uber or electric cars – a triumph of hope over knowledge.

Yet despite my warnings to readers I decided to tiptoe into a cannabis stock myself, buying Canopy Growth, one of the major Canadian players. I bought a small number of shares, not in the hope of repeating the recent frenzied share price gains but to have at least a foot in the door if things turned out better than I was expecting. After all, the illegal market had proved to be a money spinner for drug gangsters all over the world and it was to be hoped that prospective tax takes would persuade increasingly more governments to legalise.

Canopy Growth has a lot going for it. It is the biggest pot company by market capitalisation ($7 billion) with a turnover of $40 billion. It has a convincing business plan with a well-designed marketing strategy, including branding for recreational marijuana. They do not only grow marijuana, they also sell equipment, greenhouses and engineering solutions to other growers. Their medical production is GMP certified and FDA licenced, they are rolling out retail shops and they have – with drinks heavyweight Constellation Brands (Corona beer) – a deep-pocketed, major shareholder (38 per cent). Other than most high-flying start-ups they are not heavily indebted – thanks to overly generous equity investors like me, I suppose. And their New York Stock Exchange ticker is WEED, which I found irresistibly charming.

Yet, their share price tanked since I bought them at the beginning of 2019: from $50.77 to $18.81 the last time I dared to look at them in my portfolio. This is a loss of minus 63 per cent in less than a year. Canopy’s current profit margin is, according to business news publication Bloomberg, minus 488.41%. A remarkable feast, akin to a botch-up like Deutsche Bank.

Legalisation of cannabis… had not lifted the legal, licensed behemoth producers I’d wished to invest in, but the black market As much as I should have heeded my own warnings, the losses raked up at Canopy, and all other weed growers for that matter, stemmed from a problem I had not predicted at all.

As it turned out, the legalisation of cannabis in Canada and 11 US states had not lifted the legal, licenced behemoth producers I’d wished to invest in, but the black market. Many of the costs of illegally producing and distributing cannabis-based drugs could be saved now. Selling weed in countries like Canada or the US was not an expensive, high-risk business anymore, punishable with many years behind bars. Losses inflicted by forfeiture were a thing from the past.

By skipping the burden of producing medical marijuana according to the law, ignoring the taxman and by making use of already existing production facilities and established distribution channels, the illegal drug market, domestically and internationally, had an enormous cost advantage and was willing to use it without much hesitation.

Hoping for a pot of gold at the end of the rainbow, illegal and legal businesses alike boosted production to levels never seen before. As a result, prices for marijuana fell off a cliff. Canopy Growth and its peers had to put their excellent harvests in storage. Within a few months, 400 tonnes of marihuana in Canada alone proved unsellable.

The ever-growing demand so boldly predicted by market watchers did not materialise. Potheads did not multiply all of a sudden, just production did. The harvest of Canopy Growth alone – more than 40 tonnes – would have been sufficient to cover Canada’s entire recreational demand. They racked up losses of C$373 million on revenues of C$77 million. Not much of a high.

The dire example of my investment mishap proves yet again that prudent investing needs more than a convincing story, and certainly more than the frenzied hype of analysts plying their doubtful recommendations. Growth projections drafted by consultancies are often based on rather thin air.

As the world keeps smoking less tobacco, it can be safely assumed that the world will not all of a sudden consume more pot. Holland, which for decades had a rather liberal attitude on marijuana, has a lower drug consumption than many countries which have dealt with drugs more harshly.

To sell recreational drugs in competition with criminals needs distribution strategies akin to those for consumer goods: ecommerce, influencers, YouTube presence, branding, help desks. Businesses need to collaborate with regulators and health authorities, and they need administrations which enforce strict tax compliance and import regimes. If states had a stake in such companies it would certainly help.

My misfortune also proves that medical marijuana has probably a more promising, long-term future than smoking or vaping pot for fun. Such future I can see in close collaboration with Big Pharma rather than with Coca Cola and Corona beer, which both have already signalled a keen interest in cannabis-based drinks.

This implies that medical distribution licences, product pipelines, medical tests and market exclusivity will be more valuable than new farming operations. Countries like Columbia, Nigeria, Turkey or Lebanon have cultivated cannabis for millennia, with labour cheaper and a climate more suitable than Canada. They won’t give up farming now that it’s legal.

We, here in Malta, should therefore consider if our future lies in growing hemp for a market which is already oversupplied, displacing fresh produce for our farmers’ markets, or if we shouldn’t better focus on science, testing and licensing.

Such an approach would also make sure that our cultural and natural heritage will not be blighted by yet more greenhouses and sheds eating away at the little open space we have left.

More enlightened policies will only be pursued, alas, once corruption is reasonably weeded out, if you’d allow me the pun.

In the meantime, I will sit on my shares of Canopy Growth, hoping that its executives will grow to their task. To write down massive losses is not what we retail investors find easy, even when we know that this is what we should have done sooner rather than too late.

Andreas Weitzer is an independent journalist based in Malta. He reports on the economy, politics and finance. The purpose of his column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice or advice on the buying and selling of financial products.

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