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Cramer warns against buying volatile Canadian pot stocks until things settle down after legalization

Key Points
  • "I'm worried that many of these companies aren't even worth speculating on" right now, CNBC Jim Cramer says. 
  • "Canopy will be the cannabis stock that the big institutions reach for," argues Cramer on the eve of Canada legalizing recreational pot use.
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Cramer: 'Cannabis might be the most disruptive force since Amazon' for pharma, beverage industries

CNBC's Jim Cramer warned on the eve of Canada's legalization of marijuana for recreational use that he'd stay away from pot stocks for the time being.

"Everything related to the Canadian cannabis space has already run up dramatically and I'm worried that many of these companies aren't even worth speculating on," he said Tuesday evening on "Mad Money."

In fact, Canadian cannabis stocks such as Canopy Growth and Tilray have been soaring. Canopy has gained more than 400 percent in the past 12 months. Tilray, whose volatile trading captivated Wall Street in September, has skyrocketed more than 800 percent since going public in July.

Canopy and Tilray opened sharply lower on Wall Street at Wednesday's open.

Cramer argued, "There could be a lot of disappointment once it turns out that legal marijuana is a lot less profitable than illegal marijuana."

Canopy Growth CEO Bruce Linton, speaking with CNBC's Deirdre Bosa from one of his stores in Newfoundland, disputed that notion.

VIDEO5:1605:16
Canopy Growth CEO on marijuana legalization

"'Better' will be a big argument" for why more pot customers will pay up for his legal products than go back to illegal street dealers, he said on "Squawk Box" as Canada on Wednesday became the largest country in the world with a legal national marijuana marketplace.

When the excitement from Canada's legalization blows over, though, investors can start to do some careful stock picking, Cramer said.

"Once legalization goes into effect and [the] cannabis cohort cools when there's no instant pot at the end of the rainbow, I think Canopy will be the cannabis stock that the big institutions reach for. If you don't own it, I recommend waiting for it to go a tad lower, maybe you can get it below $50, which is a good price," he said. "Right now, the entire group is overheated, as we saw today [Tuesday]. But as they come down, remember that Canopy and Constellation [are] the ones to buy."

Canopy hit a new 52-week high Tuesday, adding to Monday's 14.2 percent gain after announcing a takeover of U.S.-based hemp company Evergreen. But by Tuesday's close, Canopy fell 6.8 percent to about $53.

Constellation Brands gained nearly 1.5 percent on Tuesday. In August, U.S.-based Constellation upped its bet on the cannabis industry, announcing an additional $4 billion stake in Canopy.

Disclaimer

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Key Points
  • "'Better' will be a big argument," Bruce Linton says as Canada becomes the largest country in the world with a legal national marijuana marketplace.
  • Linton says unregulated marijuana products can come with risks, including being sprayed with unnecessary chemicals.