Canada’s pot stock party won’t last, this investor says

Canada’s marijuana stocks are booming right now, with some of them climbing to all-time highs. Call it the Constellation effect, says asset manager John Zechner, who cautions that the currently unrealistic valuations in the space will eventually bring an end to the party.

News broke on August 15 that beer and alcohol giant Constellation Brands was upping its stake in sector-leading Canopy Growth Corp (Quote, Chart TSX:WEED, NYSE:CGC) to 38 per cent in a deal worth $5 billion. The announcement was seen as a further vote of confidence in the pot business, one which is seeing mounting interest from outside industries looking to capitalize on the burgeoning trade in legal marijuana.

“I’ll be honest, I had not owned these things for the longest time, but when Constellation bought in, I was just shaking my head at how much they paid and I thought, I’m missing something here,” says Zechner, Chairman of J. Zechner Associates, to BNN Bloomberg Monday.

“And when I listened to the CEO and he said, ‘We’ve been looking closely’ —and these are business people who know the thing inside and out — ‘And people are underestimating how much upside potential there is in this.’ I had to admit I was wrong, I missed it, and we went out and bought Canopy last week at $40 bucks when it opened that day.”

Canada’s marijuana stocks are undergoing a pullback today but it’s clear that recent deals have impacted investor sentiment. Earlier this month, Molson Coors Brewing announced a joint venture with Quebec-based Hydropothecary Corporation (TSX:HEXO), while last week, BNN Bloomberg reported that alcohol company Diageo Plc is searching for a partnership among Canadian cannabis companies.

Zechner says that because share prices in the pot sector are being driven by investor sentiment rather than by company fundamentals, it’ll be important to get out of the space before the tide starts to really turn.

“In the end, valuation has to support a stock at some point, and there’s no earnings,” Zechner says. “Just look at the market cap of Canopy and compare it to major companies like Telus or whatever. There’s just too much momentum, short term, and I think we’ll wait for that to wane, and then I think there will be a short story in these things.”

“It’s too hard to judge. All’s you know is that it’s way ahead of itself on a valuation basis and that’s going to matter at some point, but maybe not over the next couple of months,” he says.