Sell the pot stocks — the market is 'not what it was cracked up to be,' Jim Cramer says

Roughly one year after Canadian legalization, CNBC's Jim Cramer has tapped the breaks on his hypothesis for pot stocks claiming "the marijuana industry is just not what it was cracked up to be."

Amid growing support to end prohibition in the United States, the "Mad Money" host said he may have been wrong in calling the weed business an "incredible opportunity." He argued that it's an opportune time for investors to put the fire out and downsize their holdings since multiple equities lost at least half their values in 2019.

"The cannabis industry [has] got to be rational and rationalized — it's neither. Companies need to close, funding needs to dry up, mergers must occur," the former hedge fund manager said. "Until then, these stocks are now sell-in-the-strength detritus. A casualty of a market not yet ready for prime time or anytime, for that matter."

Cramer initially thought the budding cannabis industry represented a great investment in its infancy. Now he's saying it appears to be a "much smaller opportunity" than most projected, citing the decline in the sticker price for legal weed as Canadian companies expand production.

"Although I've been assured that there are real differences in quality between different strains, when weed is legal pretty much anyone can grow this stuff in their basement with the right equipment," Cramer said. "So I worry that maybe the equilibrium price for cannabis is much lower than we'd thought it'd be, and that's a major change."

Cramer's comments come on the heels of a months-long cascade in the trading price of marijuana stocks on U.S. exchanges, but it's not the first time that the host shifted his cannabis thesis. In July he told "Mad Money" viewers that there had been a "paradigm shift" in the industry, later instructing investors to be "selective" about the names they buy.

Canada-based Canopy Growth had once been a favorite of Cramer's, but shares of the Constellation Brands-backed weed company are down nearly 50% since founder Bruce Linton was ousted as CEO in the summer due to sub-optimal results. The ETFMG Alternative Harvest ETF, which tracks legal cannabis businesses on the market, has seen volatile trading all year as uncertainty about legalization linger. Tilray, Cronos and Aurora Cannabis shares have all lost more than half their value from their highs earlier this year. Rough quarterly reports from the industry did not change the near-term trajectory.

Recreational marijuana, while illegal federally, is legal in 11 states and Washington D.C. Medical marijuana is legal in 33 states, along with the nation's capital. The matter hit a roadblock in New Jersey and New York's legislatures, while Illinois lawmakers passed a measure that will go into effect in the New Year.

The House Judiciary Committee on Wednesday took a step toward legalization at the national level in passing a bill that would give states the power to put their own policies in place.

The weed ETF managed to spike more than 10% and Canopy more than 33% after lawmakers advanced the marijuana bill out of committee Wednesday. Canopy was also buoyed by Bank of America Merrill Lynch's upgrade of the stock to buy from neutral, but Cramer is convinced investors should take advantage of the bounce in cannabis stocks from their lows.

"Long story short, the Canadian market is flooded with marijuana," Cramer said.

"The problems in the Canadian market are structural and they won't be going away anytime soon," he said.

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