Canada’s cannabis stocks are like the tech bubble

When it comes to Canada’s cannabis stocks, it’s the tech bubble all over again, says John O’Connell, Chairman and CEO of Davis Rea Investment Counsel, who holds up Aurora Cannabis (Aurora Cannabis Stock Quote, Chart, News: TSX:ACB) as a prime example of where not to put your money in the lead-up to legal weed.

Last month, licensed producer Aurora Cannabis made the biggest splash yet in the marijuana space by buying Markham, Ontario’s MedReleaf in a $3.2 billion all stock acquisition. That’s on top of its purchase earlier in the year of Saskatoon-based CanniMed in a $1.1 billion stock-and-cash deal. Those deals vaulted Aurora past Canopy Growth Corp. (Canopy Growth Stock Quote, Chart, News: TSX:WEED, NYSE:CGC) as the largest pot company in Canada, with just weeks now to go before legalization.

But all that wheeling and dealing doesn’t amount to much, says O’Connell, who believes that when all is said and done, Canada’s cannabis space will effectively be a tight margin commodity-based industry, with profits much smaller than those currently being touted by Canopy, Aurora and the rest.

“This reminds me of JDS Uniphase back in the tech bubble when people were buying everything and it was all great and wonderful and then people figured out that a lot of these companies didn’t actually do anything or they didn’t have any actual prospects,” says O’Connell to BNN Bloomberg.

“The recreational cannabis market in Canada is probably going to deliver prices something in the neighbourhood of a buck and a half of real profit, maybe,” he says. “It’s a farming operation in Canada, and the last time I checked agricultural products tend to be pretty low margin products and they tend to be fairly protected across international borders.”

“There are lots of growers in California who can grow just as much weed as Aurora Cannabis and Canopy,” he says.

This week, Aurora launched a new product line of high-potency cannabis called Aurora Frost, which will sell for $35 per gram and is aimed at the premium market, says CEO Terry Booth.

“Successfully developing a proprietary, fine trimming and GMP compliant technology needed to produce these high-quality products at commercial scale, provides us with a remarkable advantage in addressing this niche of the cannabis market,” said Booth in a press release.

O’Connell says he’s critical of Aurora’s stock-based acquisitions, arguing that the companies being taken over are “probably not all that happy to be getting all this [Aurora] stock.”

“It’s a massively over-capitalized industry right now and I think investors have to be exceptionally careful,” says O’Connell.