Bill Harris explains why he is avoiding cannabis stocks

With legal cannabis now only a week away, many predict that Canada’s pot industry is about to go through some major growing pains, not just in terms of production and distribution which are both expected to come up short but also in the markets where eager investors have been running up prices over the past month and a half.

The excitement is understandable, says Bill Harris, partner and portfolio manager at Avenue Investment Management, but with the top three players each holding market capitalizations of well over $10 billion, current valuations are clearly beyond reason.

“We still think —and this is a pretty generic comment— that the cannabis industry, the growing, will become much more of an agricultural base,” says Harris to BNN Bloomberg. “Somebody will figure out how to brand it and it’ll maybe become investable at some point in the future but right now it’s something we just can’t do. It’s going to be extraordinary to watch, but we’ll be watching from the sidelines.”

As an example, Harris points to Calgary-based energy company AltaGas Ltd, which had its IPO in 2010, has annual revenues of $2.5 billion and currently holds a market cap of $5.6 billion.

“We talk about how hard AltaGas has to work at building Western Canada’s infrastructure to get to [that] market cap,” says Harris.

Cannabis legalization will take a number of different looks across the country, as provinces and territories have variously chosen publicly or privately run retail outlets and picked through the range of prospective suppliers. But both the production and distribution ends are expected to disappoint come October 17. The latest has Alberta opening up 17 stores by next Wednesday, for example, while BC will have just one outlet up and running and in Ontario, recreational pot’s biggest market, stores aren’t set to open until next April. Meanwhile on the supply side, industry experts say that a number of cannabis producers are likely to be well short of their supply agreements as growers struggle to scale up.

______________________________________________________________

          This article is brought to you by

              PUF Ventures (CSE:PUF)

PUF Ventures is a biomedical ACMPR applicant with a production facility located in London, Ontario. PUF’s objective is to add shareholder value through cost efficient acquisitions, joint ventures and effective marketing while maintaining a lower risk profile through diversification and sound financial management.

   Click here to learn more about PUF Ventures

____________________________________________________

Harris says that the uncertainty over how cannabis companies will work out the kinks is dividing investors.

“There seem to be two camps: those who are excited about this new industry, which is great, and then there are the traditional money managers like ourselves who say, ‘I need a track record,” he says. “I actually have to measure something and ask, ‘Are you good at what you do? Are you good at your business, are you a low-cost producer, do you have a consistent track record of reinvesting earnings and getting the same rate of return on reinvested earnings?’”

“And the problem with these new industries is that you have no information. In fact, I can tell you that none of these people are good at it because none of them have done it before,” he says.