Canada could soon come down from legalised dagga high, analysts warn

The surge of capital into Canada’s nascent dagga industry has sent stock prices soaring -- and brought warnings it is a bubble that could soon burst.

The value of 26 dagga stocks listed in Canada has swelled to almost C$4-billion (R41.4-billion) from close to nothing in the past two years, as investors rushed to bet on the country’s move toward legalising recreational use.

Canopy Growth Corp became the first dagga unicorn, reaching a valuation of C$1.24-billion (R12.8-billion) on Wednesday.

Other producers, including OrganiGram Holdings Inc and Aurora Cannabis Inc, saw their share prices surge more than 250% this year.

While investor optimism is being fuelled by analysts’ estimates that there could be about 3.8 million recreational dagga users in Canada by 2021 and billions in sales, there is mounting concern companies are overvalued.

How Canada will regulate, tax or distribute the products remains unknown and some of the publicly traded companies have yet to make a sale.

“Oh, they’re going to pop,” Nick Brusatore, the largest shareholder of Affinor Growers, said.

The Vancouver firm develops greenhouse technology for crops, including dagga.

Canada is on track to become the first Group of Seven country to legalise pot for recreational use if it pushes forward with introducing legislation next year.

It would join eight US states where it will not be a crime to use the drug recreationally by next month and follows Uruguay, which became the first country to legalise it in 2013.

Chris Damas, an analyst at BCMI Research in Barrie, Ontario, likens the capital pouring into the sector to the dot com craze of the 1990s.

At the time, the value of technology stocks had risen rapidly as investors saw opportunity in the internet’s growth despite the fact many companies had no revenue, he said.

Many holders of dagga stocks that had increased tenfold were company insiders, and the market could crash if they decided to start selling to take profits, Damas said.

“It does smell like a really serious bubble,” he said.

Companies started piling into the sector after Canada changed rules governing medical use to allow access only through licensed producers.

In 2013, Health Canada began approving licences and six medical dagga companies began trading on the TSX Venture Exchange.

When Prime Minister Justin Trudeau wooed voters with a promise to legalise the drug in the country’s 2015 election campaign, the industry began to take off.