Canada’s pot stocks may be overvalued but all that hype and hoopla around the nascent cannabis space shouldn’t be overlooked, says equity manager John Zechner, who argues that, for the time being, at least, the pot sector has a lot of momentum going for it.
It’s been an historic week for Canada and cannabis, as Parliament passed its Bill C-45 legalizing recreational use marijuana, followed up by the sitting Liberal government earmarking October 27 as the official start date.
For pot stocks like Canopy Growth (TSX:WEED, NYSE:CGC), Aurora Cannabis (TSX:ACB) and Aphria Inc (TSX:APH), it’s been good times, as well, with each company’s share price up over ten per cent for the week.
And while many are still predicting that the euphoria for Canada’s public weed companies is likely to end badly for all but a select few — last month, Bloomberg News reported that the total value of short positions held on marijuana stocks now sits at a record $2.1 billion — it’s still anybody’s guess how this will all play out over upcoming months and years.
Nor is it clear when the tides will turn and investors start to lose their appetite for cannabis stocks. Zechner says we’re certainly not there yet.
“The one thing I’ve learned covering hedge funds for a number of years is to never short momentum,” says Zechner, chairman and founder of J. Zechner Associates to BNN Bloomberg. “We can sit here all day and say that nobody knows the business model or the distribution or the tax rate, so how can you get a valuation? The valuation is exceptionally high and at some point, that will roll over.”
Zechner says that while now’s not the time to short cannabis, because the crash will be significant when it does come, it’ll be possible to wait for the momentum to die down and still gain from a short position.
“When [the rollover occurs], I don’t think the downside is five or ten per cent, it’s more like 30 or 40 per cent,” he says. “So, I need the momentum to roll over and then we’ll jump on it.”
“My point is that when these things start to roll over, they roll over big,” Zechner says. “Take bitcoin, for example: we headed north of $15,000 in December and then when it rolled, it dropped to $5,000 within a matter of two months. And so if you miss the first ten per cent, that’s not a problem.”
Of the recent success of the Canadian market (the S&P/TSX composite index hit a record high this week), Zechner says that we were due.
“Canada, because of the lagging in the energy sector and some of the cyclicals, has been behind the curve. The fact that we are finally joining this party shouldn’t be too much of a surprise,” he says. “It’s a bit of a mixed bag, but when you step back, Canada actually looks cheaper than some of the other markets. I wouldn’t be rushing money out of the Canadian markets, that’s for sure.”