Canada’s pot stocks may be enjoying the spotlight right now but look to see a major selloff in the sector once legal weed makes its debut in Canada, says investment manager Josef Schachter, who says the pain will be doubled once the market undergoes a major correction and investors abandon cannabis.
Licensed cannabis producers like Canopy Growth Corp (TSX:WEED, NYSE:CGC) and Aurora Cannabis (TSX:ACB) have been heating up over the past few weeks as the date for legalized recreational marijuana in Canada draws closer. Aurora is up over 41 per cent since mid-August, while Canopy has just about doubled in price over the same time period. And while the October 17 start date is surely on the minds of investors, so are the big deals taking place between cannabis companies and major players within related sectors such as beer and alcohol which are seeking investment in the nascent marijuana industry.
But this story is likely going to end badly for a number of companies currently vying for the cannabis limelight, says Schachter, president of Schachter Energy Research Services, who points to a similar scenario which took place in Alberta in the early nineties, when then-premier Ralph Klein privatized alcohol sales.
“Just like what happened in in Alberta when we had the government get out of the liquor business,” Schachter says to BNN Bloomberg. “You had a massive number of stores open up and then they started beating each other up over margin and then all of a sudden there are massive closures. The only public company [left] is Liquor Depot, which is not one of the great success stories, and they want to use their low-performing stores and turn them into cannabis stores.”
Liquor Depot stores are owned and operated by Alcanna (formerly Liquor Stores N.A.), in which Edmonton-based Aurora has a 19.9 per cent stake, purchased earlier this year. Last month, the two companies announced an agreement whereby Alcanna was given exclusive rights to open retail cannabis shops under the Aurora brand name. The company plans to have 37 stores in Alberta, alone, the maximum number allowed to a single operator in the province.
Schachter says investors will likely vacate the speculative cannabis sector once signs of a widespread market correction are evident. “If there’s a major stock market correction, I think people are going to pull in their horns because they’re going to be risk averse,” he says.