While shares of marijuana companies may be reaching sky-high valuations, Aswath Damodaran said “the numbers are not there” to invest confidently just yet.
The New York University Stern School of Business professor told CNBC’s “Fast Money” on Tuesday that he recommends potential cannabis investors “stay out for the moment.”
From his point of view, no pot stocks have “compelling enough stories” to make them worth buying at such high valuations.
“Companies are being priced based upon the size of the potential market and incremental information” rather than their fundamentals, Damodaran said in a blog post Tuesday. He said this is why the industry has seen so much price volatility.
Shares of the largest cannabis companies, Tilray and Canopy Growth, both fell on Tuesday after rallying a day earlier following news that Canopy Growth intends to acquire Colorado-based hemp company ebbu.
Tilray and Canopy Growth are both based in Canada, and Damodaran said he believes that country will continue to house the biggest companies in the industry. Recreational marijuana use is set to become legal nationwide in Canada on Wednesday, although each of the country’s 10 provinces will be able to set their own local regulations.
Marijuana regulations in the United States differ at the state and federal levels, with recreational use legal in just nine states. Until those discrepancies are resolved, American cannabis companies “are going to be handicapped,” Damodaran said.
For investors who still want exposure to the cannabis industry, Damodaran recommends investing in traditional companies that have made moves into the space, such as fertilizer company Scotts Miracle-Gro, which is testing its products on marijuana plants.
In August, U.S.-based alcoholic beverage giant Constellation Brands invested an additional $4 million in Canopy Growth. Damodaran told CNBC he thinks alcohol and tobacco companies are “well suited” to enter the marijuana market because of their experience dealing with regulations.
“They know this business,” he said.