Canopy Growth Corp, Aphria and Aurora will win the marijuana sector, Horizons ETFs VP says

A new survey of investment advisors finds a growing distaste for Canadian stocks —including those in the cannabis sector which have been performing poorly over the past few months.

Too bad, says Mark Noble of Horizons ETFs, who claims that with the head start that they’ll have once recreational marijuana is legalized later this year, Canada’s pot companies will be in the driver’s seat on the international stage.

Canada’s pot stocks saw a bit of a rally to close out the past week, but the sector has been in a funk ever since topping out in early January. Industry leader Canopy Growth Corp. (Canopy Growth Stock Quote, Chart, News: TSX:WEED) is down 33 per cent from its peak on January 9, while Horizons Marijuana Life Sciences exchange-traded fund (Horizons Marijuana Life Sciences Index ETF Stock Quote, Chart, News: TSX:HMMJ) is down 35 per cent its January high.

Noble says the pullback was to be expected, however, as the sector was getting way too out of whack.

“We’re looking on the Canadian pot producers side with maybe only one or two stocks that are generating positive earnings,” says Noble, vice-president and head of sales at Horizons ETFs, in conversation with BNN. “The rest of them have negative earnings, so everyone is betting on this massive potential of a $6-to $9-billion dollar recreational cannabis market, and that means that there’s volatility, because there’s nothing fundamentally underpinning those valuations. Everyone is betting on the faith of what could be, in terms of Canadian marijuana stocks.”

At its peak, HMMJ had total assets of over $900 million, whereas currently it rests around the $660 million mark.

“The big drawdown there is from the market selloff,” says Noble. “We saw about 100 per cent run-up [in HMMJ] from October to January, where that ETF was over $22. It’s now around the $15 mark, so the dropoff hasn’t actually been from people selling. Contrary to the outlook from advisors who are bearish on it, people are still holding onto that. But there’s been a big drawdown and the reason is that the valuations were getting … I don’t want to call them insane, but they were getting into an extraordinary bubble territory.”

But even with production ramp-ups still ongoing for almost every company in the space, the long game remains a good bet for Canada’s pot co’s, says Noble.

“One of the big things about the Canadian marijuana market is the capital markets financing: by being the first at the trough of capital markets financing and getting financing deals with banks like BMO and support from the capital markets, that gives them a huge war chest,” he says. “So when the green light goes in the United States, we expect those big mega-producers like Aphria, Aurora and Canopy to be able to go to the US and quickly start to consolidate and start to grab some of that prime real estate.”