The Great Pot-Stock Bubble is upon us. Investors will be tempted to get in early on one of Canada’s fastest-growing industries.

Resist that temptation.

The spectacular stock-market performance of many cannabis companies is a powerful lure to investors. In the past three months, investors have driven up the stock-market value of Canadian industry leaders Canopy Growth Corp., Aurora Cannabis Inc. and Aphria Inc. by 107 per cent, 147 per cent and 49 per cent, respectively.

Late last month, the $9.8-billion (sales) Constellation Brands Inc. of upstate New York paid $245 million for a 9.9 per cent stake in Canopy Growth, world’s largest publicly traded marijuana company. The marketer of Corona beer and Black Velvet whisky wants in on the ground floor ahead of the day America decriminalizes pot at the federal level.

But the current euphoria for marijuana investments is identical to the irrational exuberance of the ill-fated dot-com era of the late 1990s, which yielded exactly one change-the-world success story – Amazon.com Inc.

Here’s a short list of what should worry prospective investors in the nascent Canadian cannabis industry.

1) The commercial pot market isn’t as big as it looks

The Canadian market for medical marijuana products is estimated at $1.3 billion. That market has already plateaued, a worrisome sign.

The market for recreational pot is estimated at $6 billion by 2021. But that assumes the black market and homegrown pot will simply disappear, and be absorbed by the legal market.

That’s a poor assumption.

The black market isn’t weighed down by the legal industry’s many costs. They include navigating a regulatory labyrinth, including GST remittances; operating bricks and mortar and online shopping channels; and the federal mandate to provinces and territories to test the quality of marijuana products, which will show up in retail prices.

The black market will thus enjoy a cost advantage over the legal market. And biker gangs and “the pusher who sells drugs in the stairwell” (Prime Minister Justin Trudeau’s expression) have little to fear from an under-resourced criminal justice system that cannot even enforce the laws on driving while texting, a growing cause of death and injury.

2) Too many players

There are about 70 publicly traded marijuana firms in Canada, a ridiculous number for a relatively small market like Canada. That is an accident owing to America’s refusal to decriminalize pot at the federal level, prompting start-ups to favour the Great White North.

There are at least another 20 privately held Canadian cannabis firms. Most of these are hoping for a stock-market listing so that they too can tap Main Street investors for the enormous amount of capital they require.

There will be a “shakeout” of those firms. Some will be merged out of existence, while most will simply perish.

3) Prices and margins will fall

As provinces like Ontario and Alberta begin purchasing marijuana wholesale, recreational pot prices will plummet. They are forecast to fall from the $7 to $12 per gram currently paid for medical marijuana, to $4.50 to $5.

That in turn will cut producer profit margins at least in half, from as high as 80 per cent to 90 per cent currently – a big draw for today’s investors – to less than 40 per cent by this time next year.

Margins are destined to fall still further when Big Pharma, with its massive resources, gets into the game.

4) Patchwork regulation

Ottawa has been exceedingly deferential to other levels of government in helping shape a legal pot industry.

Provinces, territories and municipalities will determine what types of pesticides can be used in pot cultivation; the required distance between a retailer of marijuana products and the nearest school; the type of advertising and other marketing methods that are permissible; and the minimum age of buyers.

The result is a patchwork of regulations that ensures the legal market will be less efficient than the black market.

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For instance, the feds have set 18 as the minimum age for buyers. But provinces and territories are free to set higher minimum ages. Some provinces will set the age at 20.

Because pot use skews to youth, a legal age of 20 rather than 18 will mean hundreds of millions of dollars in revenue not available to the legitimate industry. Users below 20 — below 18, even — will help keep the black market in existence.

5) A costly success formula

At least for now, there appears to be only one business model for achieving sustainable success.

To survive means expanding production volumes in order to cut per-unit costs, even at the risk of glutting the market and driving down retail prices. Aurora Cannabis is in the process of expanding production 18-fold.

Achieving sustainable viability also requires firms to acquire the expertise to supply as many markets as possible, starting with both medical and recreational. And they will have to spend heavily on new-product development, creating branded products unique to them, such as cannabis-infused beverages, oils, baked goods and lozenges.

And they will need to expand their geographic reach. Canopy Growth is among the firms that have distributors in U.S. states and European countries where recreational marijuana is legal.

But that model is enormously expensive. It requires costly internal growth and acquisitions. The already rampant merger activity in the sector is forcing up the price of acquisitions. Only a few companies will prove capable of attracting sufficient capital to become long-term players.

6) Dismal financial performance

The financial statements of the three industry leaders mentioned at the top of this story make for ugly reading.

Canopy Growth, based in Smiths Falls, Ont., boasts an eye-popping stock-market capitalization of $3.5 billion. Yet its revenues, at just under $40 million, don’t begin to justify that valuation. Canopy Growth has lost money in each of its past three fiscal years. And its losses are growing, to $16.6 million last year after a loss of $3.5 million the previous year.

Aurora Cannabis, which sports a market cap of $2.5 billion, posted revenues of just $18.1 million last year, a period in which its losses deepened, to $13 million, from $5.7 million a year earlier.

And Aphria, of Leamington, Ont., managed a fiscal 2017 profit of $4.2 million that looks respectable until compared with the firm’s outrageous market cap of $2.5 billion.

Looking back from 2030, it’s easy to see perhaps two companies among the current close to 100 players still standing, in an industry subjected to waves of consolidation. It’s quite likely that the 2030 industry will be dominated by Big Pharma. And investors in scores of homegrown pot companies will have lost several billion dollars.

Today’s heady market in pot stocks won’t last. So only the most risk-tolerant and speculative-minded investors should go anywhere near it.