Tom Stevenson: Will cannabis really be a pot of gold?

COMMENT: Your pension pot may be about to take on a whole new meaning. I promise there'll be no more puns about this week's topic - the unfolding cannabis investment boom. And let me just pre-empt the outrage. As far as I am concerned, recreational cannabis is no more dangerous than alcohol or tobacco. Meanwhile, there is growing evidence that medicinal cannabis can help people living with a range of conditions from epilepsy to MS.

Like alcohol and tobacco, cannabis looks poised to become a huge global market. Next month, recreational use will be legalised in Canada. It is already legal in 30 US states for medicinal purposes and in eight recreationally.

Medicinal cannabis is legal in Germany. In the UK, Home Secretary Sajid Javid, was advised by the Advisory Council on the Misuse of Drugs that medical cannabis has therapeutic effects.

Unsurprisingly, the money-making potential of weed has caught the attention of investors. If you want to know what's going on, follow the money.

Cannabis-related stocks have been soaring, in what is starting to look like the early stages of a classic investment bubble. On one day last week the hottest stock in the sector, Canadian medical cannabis group Tilray, saw its share price double then lose all its gains before the trading session was out. Having floated at US$17 ($25.60) a share earlier this year on Nasdaq, it cleared $300 briefly and, despite its fall, remains a 10-bagger in just two months, at around US$175. This is reminiscent of last year's cryptocurrency bubble but to me it feels more like the dot.com boom of 20 years ago.

Last year, marijuana-related sales in the US were estimated at US$6 billion. By 2022 that is expected to be US$22b.

Like all investment bubbles, cannabis started out as a niche interest. But once it became clear that the direction of travel was towards widespread acceptance and likely legalisation, the mainstream began to latch on.

Legal pot represents a huge threat to established industries, so the most vulnerable are hedging their bets. Constellation Brands, which brews Corona beer, has made a US$4b investment in Canopy Growth, the largest Canadian grower and already a US$10b company. Coca-Cola is said to be considering a deal to market cannabis-infused drinks.

The next stage in any investment boom is when Wall Street sees its chance to cash in, developing the vehicles that enable widespread participation. There aren't many ETFs currently available but two, Horizons Marijuana Life Sciences ETF and ETFMG Alternative Harvest, are leading the charge. Unsurprisingly, given the immature nature of the sector, they are both invested in many of the same stocks, fuelling the surge in prices of what are very illiquid issues with tiny free-floats of available shares.

In another echo of previous bubbles, opportunistic companies are starting to jump on the bandwagon. In 1999, the dullest old-economy business could turbo-charge its share price by adding.com to its name. This time run-of-the-mill companies are cashing in on the latest mania. New Age Beverages, a US drinks company, saw its shares rise more than 600 per cent when it announced it will launch a range of cannabis-infused drinks next month.

This is a classic late-cycle investment bubble, and it is no coincidence that it is unfolding against a backdrop of new record highs for the S&P 500 and Nasdaq. When Donald Trump poured fuel on the US economy's smouldering fire with a US$1 trillion wave of repatriated profits, tax cuts and fiscal stimulus, he put in place the required conditions for the stock market's last hurrah. The internet, housing, legal highs - the only difference is the story. The shape of the boom is always the same. And, as with the dot.com bubble, there is a spectrum of ways to participate from the relatively safe to the purely speculative. .

If you are tempted by the pot boom, don't forget the fundamentals won out in the internet bubble. Marijuana remains illegal at the Federal level in the US. The laws of supply and demand have not been abolished and a glut of marijuana will see its price collapse. And buying any stock on a huge multiple of sales almost never makes sense. Expectations, like investors, can get too high. Sorry, couldn't resist.