Are Canada’s marijuana stocks a dot-com like crapshoot?

A growing chorus of pundits think Canada’s marijuana sector has gotten ahead of itself.

The most recent dissenting voice, James Thorne, senior portfolio manager and chief capital market strategist with Caldwell Investment Management, was on BNN Wednesday to talk about a group of stocks he compares to the dot-com era, before it became known as the “dot-bomb” era.

Thorne says trying to navigate the admittedly “interesting” space is a bit of tricky stick handling.
“Let’s go back to the 1990s, when we were looking at all the ‘dot-com’ stocks,” he said. “You couldn’t distinguish between Amazon, StickK.com, Grocery.com: You couldn’t distinguish who the winners were going to be. It’s an interesting area, but we just don’t invest any money into it right now”.

In Mid-November, after six marijuana stocks were halted after triggering automated circuit breakers activated when a stock falls or rises ten per cent or more in a five minute period, another fund manager sounded the alarm on the sector.

“I certainly wouldn’t be surprised if we’re seeing some sort of euphoric top today,” StoneCastle Investment Management’s Bruce Campbell told the Financial Post. “When they trade at this kind of volume and spike up like that and the valuations are sort of off the charts, it’s sort of indicative of that.”
Bloomberg’s Jen Skerritt notes that the value of 26 marijuana stocks listed in Canada is now nearly $4-billion. But even that less than one times what some analysts think the market will soon be worth.

PI Financial analyst Jason Zandberg, who in July initiated coverage of four stocks in the space, Aphria (TSXV:APH), Canopy Growth Corp. (TSXV:CGC), Mettrum Health (TSXV:MT) and OrganiGram Holdings (TSXV:OGI) with “Buy” ratings, thinks the next few years will be ones of strong growth for the Canadian marijuana market, with demand from both recreational and medicinal users. Zandberg believes that by in 2019, which he estimates to be the first year after recreational use is permitted in the country, the market will be worth $4.6-billion. He expects this will grow 10 per cent annually, reaching $7.4-billion within the first five years, evenly split between medicinal and recreational users.

Picking the winners will be important, says Zandberg, because the environment is rapidly becoming more favourable to licensed producers. The CEO of one of these LPs shakes off the notion that the marijuana sector represent nothing less than a sea-change.

“The stocks are not overvalued,” Denis Arsenault, CEO of Moncton, New Brunswick-based OrganiGram told Bloomberg Wednesday. “Volumes have risen alongside prices, which signals that investment funds are becoming more comfortable with the industry and the idea that a legal one will soon exist in Canada. The investment community is waking up to the reality this is going to happen.”