Last year, the marijuana industry did something it had never done before: It gained legitimacy.

In October, Canada became the first industrialized country and only the second country in the world, besides Uruguay, to legalize recreational weed. Although it's going to take a few years for the industry to ramp up its capacity, the legal cannabis industry in Canada is very much capable of $5 billion or more in added annual sales. Of course, this is just the beginning.

The latest co-authored report from Arcview Market Research and BDS Analytics calls for 38% growth in legal pot sales globally in 2019 to nearly $17 billion. This will be the result of Canada's legalization, rapid sales growth in California, and ongoing legalization efforts throughout the world (and within the United States).

The most overvalued pot stock

As investors, we're cognizant of the once-in-a-generation growth opportunity that legal cannabis presents. We're also acutely aware that not every pot stock will be a winner, or is worth buying. This means, even in the early going, there are almost certainly overvalued marijuana stocks.

With the understanding that valuation can be subjective, I see a number of well-known pot stocks that have difficult-to-justify market capitalizations. One, however, stands out as being the most overvalued of all.

The runner-ups

This time last year, I would have given Aurora Cannabis (NYSE:ACB) the nod as the most overvalued pot stock. Aurora is on track to be the largest producer of all Canadian weed stocks, with "more than 500,000 kilograms" (over 1 million pounds) annually, according to the company. But this estimate is probably conservative, especially with Aurora completing its acquisition of South America's ICC Labs in late 2018. ICC already had 92,000 square feet of operational grow space and was in the midst of constructing another 1.1 million square feet of capacity. This should push Aurora to around 700,000 kilograms of annual yield, in my estimate.

But Aurora also has a dark side: dilution. The company's growth-at-any-cost strategy has made its stock a deadweight for its shareholders. Aurora has completed a number of major acquisitions, financing these deals entirely, or almost entirely, with its common stock. Since the end of its fiscal 2014 (June 30, 2014), its share count will have ballooned from 16 million to what I suspect will be more than 1 billion by the end of fiscal 2019 (June 30, 2019). And yet, I don't consider it the most overvalued marijuana stock right now.

A really close runner-up in the overvaluation department is Tilray (NASDAQ:TLRY). This is a company that listed its shares at $17 for its initial public offering and, less than two months later, hit an intraday high of $300, which was good enough for a $28 billion valuation.

Admittedly, there are aspects of Tilray's business model to appreciate, including its partnerships with Anheuser-Busch InBev and Novartis, its capacity potential stemming from its ownership of land adjacent to its existing facilities, and its well-known medical-cannabis brands. But it ultimately comes down to the almighty dollar, and Tilray is in no way on track to be profitable on an operating basis in 2019, or perhaps even 2020. Rather, Tilray will be spending liberally on capacity-expansion projects, production diversification, international expansion, and possibly acquisitions. This makes its $7.2 billion valuation just silly.

The priciest pot stock of them all is...

But there's one popular marijuana stock with a valuation that makes me absolutely cringe in horror: Cronos Group (NASDAQ:CRON).

Cronos has been nothing short of a Wall Street darling since striking two key deals. In September, it made a deal, potentially worth up to $100 million, with Ginkgo Bioworks to develop yeast strains capable of producing cannabinoids, including some very rare ones, at commercial scale.

Then, in December, it landed a $1.8 billion equity investment from tobacco giant Altria (NYSE:MO), which is pending approval and closing. The deal with Altria is particularly important as it'll remove any cash concerns Wall Street may have had about the company, and it'll set the duo up to work on complementary products, such as cannabis vapes, where legal. Not to mention, this investment gives Altria a 45% equity stake in Cronos Group, with the option to up it to 55% with warrants that the tobacco company will be issued.

So what's not to like? Even though production isn't everything, one of the biggest issues I have with Cronos Group is its peak output potential relative to its market cap. Cronos Group should complete its flagship joint venture, Cronos GrowCo, by midyear, with the 850,000-square-foot facility capable of yielding 70,000 kilograms at the peak. Aside from this, Cronos will achieve up to 40,000 kilograms from Peace Naturals, and little tidbits of production from its international ventures and Original BC division. In essence, squeezing the turnip maybe gets Cronos to 115,000 kilograms to 120,000 kilograms a year. But following the Altria deal, the company would be worth nearly $4.5 billion, based on its market cap as of this past weekend.

There's no good justification, even with $1.8 billion in cash, for Cronos to be valued so aggressively relative to its production potential, when you can scoop up HEXO or OrganiGram Holdings, with their respective peak annual estimates of 108,000 kilos and 113,000 kilos. HEXO has a market cap of $1 billion, while OrganiGram's is $620 million.

Whereas most pot stocks are moving toward substantial profits, that's a pipe dream for shareholders in Cronos Group. With Cronos being so late to the game on the capacity-expansion front, and having to build up and market its existing brands, there's a very good chance that even if the company is profitable, its earnings per share will be marginal, at best. Its forward P/E of 329 pretty much confirms this thesis.

Also, Cronos won't be helping its cause if the Altria deal closes (as is expected). The issuance of common stock to Altria, along with the warrants, will balloon the company's outstanding share count. This means net income will be divided into more shares, thus lowering earnings per share. It could be years before Cronos Group presents a price-to-earnings ratio that's even remotely palatable to fundamentally focused investors.

And lastly, Cronos hasn't done much in the way of international expansion, save for Australia and Israel. Expanding abroad doesn't happen overnight, but Cronos seems to be slower than its large peers in pushing into new markets.

I'm hesitant to suggest short-selling anything in the cannabis space, because the industry is volatile and borrowing costs are incredibly high (pardon the pun). But if I had to single out one marijuana stock as a sell, it would be Cronos Group.