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David Burrows explains why he is shorting the marijuana sector

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David Burrows

With an October 17 start date decided and supply agreements with the provinces currently being firmed up, all that’s left for Canada’s marijuana sector is to deliver on all those promises of future earnings that’ve been baked into their valuations.

And while we’ll likely see a few pot companies emerge as bonafide businesses, a lot of also-rans are going to get cast aside in the process, says David Burrows of Barometer Capital, who thinks that even the successes in Canada’s pot industry will be a lot more modest than they’re being made out to be.

The news arrived on June 20 that the recently passed Cannabis Act would take effect on October 17, and with that came renewed interest in Canada’s pot stocks, which as a group experienced a nice rally over the ensuing couple of days.

But there’s been a noticeable drop off since, led by companies like Canopy Growth (TSX:WEED, NYSE:CGC) which is down more than 28 per cent since June 22, Aurora Cannabis (TSX:ACB) which has dropped 25 per cent and Aphria (TSX:APH) which fell 17 per cent.

So, why the plunge at a time when optimism should be taking hold across the sector? Burrows says it’s because that good faith has already been factored in well beforehand, leaving the market now tapping its foot and waiting to see some actual results.

“This group has had a tremendous run and there are tonne of companies that were created, and some of them are going to have great success,” said Burrows, President of Barometer Capital, to BNN Bloomberg this week. “The market’s all about anticipating what’s coming next and what’s coming next is a lot of heavy lifting. There’s going to have to be a lot of ‘Show me’ now, and I think the group is probably ahead of itself.”

Last week, British Columbia became the latest province to announce its supply agreements, stating that it had entered into memoranda of understanding with 31 licensed producers, including the BC operations of Canopy, Aurora and Aphria but also featuring locally-based companies like Tilray Canada and Whistler Medical Marijuana Corp.

Burrows says investors need to be cautious about jumping into the sector, as the roll-out of rec cannabis is sure to entail a number of casualties. He points to the Horizons Marijuana Life Sciences ETF (TSX:HMMJ) as one product likely to feel the impact of those failures.

“In full disclosure, in my macro fund, I’m actually short the HMMJ ETF,” he says. “My view is that a lot of expectation was built in. Technically, it’s kind of busted. While I’m sure that there’ll be some big winners in the group, right now, it’s under pressure. And that’s at a time when there are other groups that are performing quite well.”

On the international level, Burrows says that claims giving first-mover advantage to Canadian cannabis companies could very well be overblown. “One of my questions is, a lot of Canadian marijuana companies think that they will become the supplier to the world, and I’m not so sure,” he says. “There’s a reason why they call it a weed — it grows easily, everywhere. So, I just think it’s not as easy as that.”

“I think a lot of good news is already in the market and I think that now you’re going to have to show me the money,” he says.

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About The Author /

Nick Waddell
Cantech Letter founder and editor Nick Waddell has lived in five Canadian provinces and is proud of his country's often overlooked contributions to the world of science and technology. Waddell takes a regular shift on the Canadian media circuit, making appearances on CTV, CBC and BNN, and contributing to publications such as Canadian Business and Business Insider.

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