The '420 Investor' Talks Canada's Legalization, Calls Cannabis Stocks A Crowded Trade Right Now

Wednesday is a landmark occasion for the marijuana industry, with recreational cannabis becoming legal nationwide in Canada. Alan Brochstein, author of The 420 Investor, joined Benzinga’s PreMarket Prep trading show to discuss the impact of Canadian legalization.

Canada Vs. Colorado

When asked about the immediate impact of Canadian legalization, Brochstein said investors will likely be majorly disappointed with the initial launch.

"In Ontario, the largest province, you can only buy online," Brochstein said. "In the other provinces, there’s only like one store or a few stores--17 stores in Alberta-- so it’s not a great experience. It’s nothing like Colorado in 2014.”

Global Growth Opportunity

Despite the lackluster Canadian launch, Brochstein expects the cannabis retail situation to improve dramatically over time, but it may take some time for popular cannabis stocks to grow into their valuations after huge run-ups ahead of Canadian legalization.

“I think the important thing to understand when you’re looking at the valuations is to understand that the Canadian legal market is just a small part of these companies,” he said.

Canada has given out 132 licenses to cannabis companies up to this point, which Brochstein says is way too many and likely makes it inevitable that many companies will fail.

“The big winners will be the ones who aren’t focusing exclusively on serving the Canadian consumer but are more focused on serving the global medical market,” he said.

Crowded Trade

Brochstein said it’s short-sighted to look at the valuation of marijuana stocks in terms of the Canadian market alone. In the near term, however, Brochstein said marijuana stocks have become an extremely crowded trade, and he’s not surprised at the weakness in popular stocks this week.

“I’ve been saying for a long time I didn’t see this as a huge catalyst for the market,” he said. “If you go back to the elections here in the United States in November 2016, we had a similar type of sell-off right before the election, so I think you had some people jumping.”

Brochstein said he expects this week’s sell-off to be met with more buying volume coming into the market on the dip.

Price Action

Here’s a look at how marijuana stocks are reacting over the past two days:

• GW Pharmaceuticals PLC-ADR GWPH is up 1.5 percent.
• Cronos Group Inc CRON is down 5.5 percent.
• ETFMG Alternative Harvest ETF MJ is down 6.6 percent.
• Canopy Growth Corp CGC is down 8.7 percent.
• Tilray Inc TLRY is down 9.4 percent.

Listen to the full interview with Brochstein at 14:15 in the clip below.

PreMarket Prep is a daily trading show hosted by prop trader Dennis Dick and former floor trader Joel Elconin. You can watch PreMarket Prep live every day from 8-9 a.m. ET here. The replay can be found on Benzinga's YouTube channel, and the podcast is on iTunes, Google Play, Soundcloud, Stitcher and Tunein.

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