Gundlach: The cannabis boom looks like a 'mania'

After a red-hot 2018, cannabis stocks are on fire again to start the year.

Canadian cannabis company Canopy Growth (CGC), for example, is up nearly 60% through February, as shares of its competitor Aurora Cannabis (ACB) have posted gains of 35% over the same stretch.

The moves higher in such a short time period have some investors issuing caution, including “Bond King” DoubleLine Capital CEO and founder Jeffrey Gundlach, who warned investors about the cannabis “mania” in an exclusive interview with Yahoo Finance on Feb. 13. DoubleLine oversees $121 billion in assets.

“The cannabis thing does seem like a mania,” Gundlach said. “I've got young guys working for me that are big believers in the cannabis thing, and they claim that it's all about getting shelf space and branding and getting bought out by another big company… But I don’t know.”

Canopy Growth, the largest cannabis company by market cap, reported earnings Thursday and posted a 282% jump in net revenue in its latest quarter. Still, however, Gundlach expressed concern that cannabis companies could be overvalued.

“People make a lot of money in some parts of it, but that's just not for me. I've no interest in mania stuff,” Gundlach said. “I don't understand why just because it used to be illegal, that somehow it's got this special magic to it.”

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Companies in other so-called “sin industries” have been increasingly trying to tap into that special magic to boost slowing growth. For example, alcohol giant Constellation Brands, which distributes Corona and Modelo beer in the U.S., invested $4 billion into Canopy Growth last year. Canopy has used a portion of those funds to develop and produce cannabis-infused beverages that are expected to debut in Canada later this year.

‘There is an explosion in smoking’

Tobacco company Altria, which sells Marlboro cigarettes, also made a large bet on the cannabis space. In December, the company invested $1.8 billion in cannabis firm Cronos Group, in hopes that the rise of marijuana could help buoy the decline in traditional cigarette sales. Altria also invested more than $12 billion in e-cigarette startup Juul Labs for the same reason.

Juul, much like some cannabis companies offering CBD products, has faced scrutiny from the U.S. Food & Drug Administration over the fact that more teens are increasingly taking up vaping. A new survey from the Centers for Disease Control and Prevention revealed a 38% rise in the amount of high schoolers using tobacco products, including e-cigarettes.

“There is an explosion in smoking, which I suppose it's probably like a gateway for the cannabis industry. So, maybe there's something there, but I find that to be an incredibly horrifying statistic,” said Gundlach. “In one year, 38% increase. And now over 50% of high school kids are either smoking, mostly vaping, I think, which is probably far worse, far worse than traditional cigarettes.”

[Full transcript of Jeffrey Gundlach’s extended conversation with Yahoo Finance]

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Zack Guzman is the host of YFi PM as well as a senior writer and on-air reporter covering entrepreneurship, startups, and breaking news at Yahoo Finance. Follow him on Twitter @zGuz.

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