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Can Australians get rich quick in the pot stock sector?

Ever since the federal government gave the go ahead for the prescription of medical cannabis products for patients hype has swirled around Australia’s pot stock sector.

When and for what medical purposes medical cannabis derivatives can be prescribed is still up to state governments to decide, with the legislation yet to translate into sales for any of the pot stock companies.

At the start of 2018 the sector received more good news when the government announced it would permit the export of cannabis overseas for medical use. Again though the legislation is new and yet to translate into anything in the way of sales or forward sales contracts for pot stock hopefuls.

Some studies have estimated that medical cannabis in Canada retails for around CAD$7.5 per gram and theoretically Australian cannabis could retail at a similar price, which means 5 tonnes of the crop could harvest around A$37,500,000. Even if not that much it’s clear there’s serious money to be harvested in the sector if it delivers on its potential.

These sales estimates are exciting investors, because of the particular potential for weed to be legalised for recreational use in Canada and across many U.S. states.

Exactly how much weed is smoked recreationally in Canada annually is unclear, but ballpark estimates have it as around 600,000 to 800,000 kilograms a year.

Canadian producers alone are expected to meet this supply, but that’s not stopping others attempting to cash in on the growth in demand for cannabis for recreational or medical purposes globally.

If one of the ASX’s many medical marijuana hopefuls can deliver some meaningful sales it will then need to make a profit on those sales to take the next step to becoming investment grade.

Serious investors generally only buy profitable companies, or those with a long track record of revenue growth and visible path to profitability ahead.

As such the medical marijuana sector on the ASX largely consists of companies spinning stories about their potential to grow sales as the legislative environments in Australia, Europe and North America offer growing opportunity to commercialise cannabis-based medical products.

Estimates for the value of the medical marijuana sector Down Under range from $75 million per year to $1 billion per year, depending on where you check or who you ask. The reality is that no one knows the size of different markets as it would depend on what medical marijuana products were available and on what basis doctors would prescribe them among many other factors.

Some of the pot stock hopefuls on the ASX include MGC Pharmaceuticals Ltd (ASX: MXC), MMJ Phytotech Ltd (ASX: MMJ), Zelda Therapeutics Ltd (ASX: ZLD), Botanix Pharmaceuticals Ltd (ASX: BOT), Cann Group Ltd (ASX: CAN) and Auscann Group Holdings Ltd (ASX: AC8).

Even failed software business 1-Page Ltd (ASX: 1PG) and bauxite miner Queensland Bauxite Limited (ASX: QBL) are attempting to cash in on cannabis-crazed investment markets.

I suspect very few of these companies will provide investors respectable long-term returns based on their current valuations. As such it’s a sector to avoid in my opinion.

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Motley Fool contributor Tom Richardson has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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