Pot player Emerald Health isn’t building long-term value, this portfolio manager says

Investors looking for a long-term hold in the cannabis market may want to pass on Emerald Health Therapeutics (Quote, Chart TSXV:EMH), at least until the company shows signs that it’s not just a cannabis crop producer, says Gerald Ferguson of Jemekk Capital.

Canada’s marijuana stocks are on the march as we enter the final weeks before recreational cannabis becomes a reality. The past month has seen share prices jump on news of supply agreements and deals with alcohol and pharmaceutical companies looking to get in on the newly formed industry.

Until lately, Victoria, BC’s Emerald Health has been relatively quiet on that front, but a couple of recent announcements have caught attention, including a partnership with nutritional supplement company Factors Group and supply agreements locked up with Ontario, BC and Newfoundland.

For much of 2018, EMH’s share price has been on a steady slide from its late January high but it has doubled since mid-August, rising from $2.74 to where it currently sits at $5.42.

Yet Ferguson says that as far as being a company with staying power goes, at the moment, Emerald is missing the branding and the value-added product development that he thinks will be key elements in the cannabis space going forward.

“They have a joint venture on a million-square foot venture in Delta, BC, where they’re already growing and cultivating plants,” says Ferguson, CEO and founder of Jemekk Capital, to BNN Bloomberg. “That was a big asset a couple of years ago, and maybe for the next year or so.”

“To be able to produce 100,000 kilos a year of cannabis is great, but you’re going to be able to go out and buy it from farmers because the federal government has already indicated that they’re going to allow outdoor grow, so why grow it in a greenhouse when you can grow it cheaper outdoors?” he says.

“A lot of that cannabis is going to be turned into oils, so the actual quality of a lot of the cannabis won’t be critical for a lot of the products it’s going to go into,” he says.

Ferguson argues that while Emerald’s joint venture with greenhouse crop grower Village Farms International (TSX:VFF) will put them ahead of some other players when it comes to supplying Canada’s medical and recreational cannabis, ultimately that won’t be enough.

“There will be a supply shortage within the first 12 to 18 months, so companies like Emerald Health and their partner Village Farms will be able to profit from it, but that’s more of a windfall. That’s not really building long-term value,” Ferguson says. “Long-term value will come in brands and products and partnerships and I haven’t seen a lot out of Emerald Health on that yet.”