Investors need to remember that this is a new industry and Canada is the first G7 nation to legalize the drug, so hiccups are to be expected. Both Willis and Brochstein think the long-term opportunity is huge, with Grand View Research saying the global pot market will be worth $146 billion by 2025.
For things to really take off, though, other countries need to legalize weed. Canada, with 35 million people, is a decent size, but it's small compared to everyone else. If the U.K. legalizes marijuana — and the country did just start allowing doctors to prescribe it — and Germany comes around, and if the United States legalizes it on a federal level, then it becomes an industry on par with tobacco or booze.
It will still be years before this happens, but Canada's foray into legal weed should push other countries to get there faster, Willis said. "The U.K. did an about-face; it flipped in three months from not allowing medical prescriptions to allowing them," he said. "That shows the power of what Canada has done."
Even if you believe in the long-term opportunity, Willis suggests waiting until the second half of 2019 to buy in. Valuations are still too high, with some of the big companies trading between 20 to 55 times earnings, but they will come down over the next few months. Eventually, they should be more in line with tobacco and alcohol businesses, which trade at around 10 to 14 times earnings.
Any investor feeling the cannabis itch should consider some opportunities in the United States, which is less regulated than Canada. American companies have fewer restrictions on how they can market their wares, and they have more strains to sell. They're much smaller, so they carry even more risk, but companies like MedMen or iAnthus, which have operations in multiple states, trade at lower valuations than their Canadian counterparts. Both are down 7 percent on Wednesday, but still up on the year.
"They're expensive, but it's not as crazy," Willis said. "It's kind of like Canada in 2013."
Willis said the best advice is to look for the lowest-cost producers — it is currently Aphria in Canada – and for businesses that seem to be closer to generating a profit. Tilray had the smallest net loss among the big three reports this week, though its loss did widen from the year-ago quarter. Willis said none of them are close to making a real profit. Aphria is the closest to breaking even and should be generating net income by the second quarter of 2019 (June-ending quarter). Canopy is the farthest away from breaking even.
The best advice for investors determined to bet on the cannabis sector: Be patient.
"This is a long-term story," Brochstein said. "It's a huge market, and things will get better."