Canopy Growth and Aurora Cannabis are still too risky

Investors continue to be transfixed by Canada’s marijuana sector, even as names like Canopy Growth (TSX:WEED, NYSE:CGC) and Aurora Cannabis (TSX:ACB) remain well off their record highs set back in January.

And while rec pot’s legalization may be just around the corner, there are still too many unknowns, says David Cockfield, Managing Director at Northland Wealth Management, who claims that the smart investor should resist temptation and stay clear of the still-evolving space.

Last week, Canopy Growth, the first cannabis company to get listed on the TSX, became just the second to go public on a US exchange, now trading on the NYSE under the ticker CGC. Company CEO Bruce Linton called the event a “continuation of our upward trajectory as we build the global cannabis industry.”

For Canada’s pot stocks that buildup starts at home, as Canopy Growth, Aurora and the rest continue their expansion plans in the lead-up to rec legalization, now said to be a reality by the end of the summer. But for an industry with an expected footprint of more than $5 billion annually in marijuana sales alone, we’re still relatively in the dark as to how it will all shake out.

So far, every province and territory has given indication of its preferred method of sale, involving either privately-run retail stores, government-run stores, government-operated online sales or some combination of the above. But pricing is still an unknown, as is the extent to which companies will be allowed to promote their own brands, both of these elements being crucial to determining profit margins for cannabis producers — which means that all those gloriously large EBITDA estimates for Canada’s cannabis producers are at this stage purely shots in the dark. Not exactly the stuff of clear-minded investment decisions, says Cockfield.

“We’re being bombarded by clients who are reinvesting in the marijuana stocks, [but] essentially, we want to see some hard numbers. We want to know where the government is going to charge, what are the margins going to be, what kind of distribution,” he says to BNN Bloomberg.

“I think that the industry will turn out to be a positive growth industry at some point in time, and then you’ll be able to pick the names. Now, there’s some consolidation going on, so who knows what the names are going to be,” he says. “It’s just a little too early to make an actual investment in this sector. We want to see a little more detail.”

Earlier this month, Aurora Cannabis made its second big purchase in recent months by announcing the acquisition of rival pot co MedReleaf Corp (TSX:LEAF) for $3.2 billion, a move which effectively leap-frogged Aurora over Canopy as the world’s largest cannabis company. Investor response was far from stellar, however, as both stocks went on to post losses over ensuing days of trading.

Although it’s tough to pick the winners among the herd at this point, having diversified exposure to the cannabis space doesn’t seem to be any better, says Cockfield, who says that the Horizons Marijuana Life Sciences ETF (TSX:HMMJ) as a case in point.

“The ETF came out and did well and then not so well. There are a lot of questions that if you’re a responsible investor manager, you want to have some hard numbers to deal with, and we just don’t have them,” Cockfield says. “You really should sit on the sidelines as far as marijuana stocks are concerned.”

More Cantech Cannabis