More carnage is coming for marijuana stocks, this investor says

It’s been a dizzying couple of months in Canada’s marijuana space where investors began to pile into not just industry heavyweights like Canopy Growth (Canopy Growth Corp Stock Quote, Chart TSX:WEED, NYSE:CGC) and Aurora Cannabis (Aurora Cannabis Stock Quote, Chart TSX, NYSE:ACB) but smaller names, as well, all starting in mid-August when Canopy announced a new $5-billion deal with alcohol giant Constellation Brands.

Many stocks in the sector saw their valuations soar over the space of the two months leading up to Canada’s rec cannabis legalization date of October 17. The Horizons Marijuana Life Sciences Index (TSX:HMMJ) which tracks the performance of the sector in general went from a low of $14.54 on August 14 to a high of $27.00 on October 16.

Then, while Canadians celebrated the end of cannabis prohibition, many by waiting in long lines for their first purchase of legal pot, the bottom fell out of the cannabis space in no short order. Over the ensuing two weeks, Canopy has lost 37 per cent of its value as of late-day trading on Friday, Aurora is down 44 per cent and HMMJ is now down 30 per cent.

Marijuana Stocks Haven’t Seen the Bottom

But there’ll be more carnage ahead for the sector, says Acker, President and CEO of Acker Finley Inc.

“As the fundamentals come out in terms of sales and earnings, the market will suss out who the winners are going to be,” Acker told BNN Bloomberg. “We’ve had a little bit of a crash but I think there’s more to it that’s going to come.”

“These guys are going to probably start reporting after the December quarter,” he said. “I would avoid the space altogether, and as value managers, what I’d love to do is pick through the rubble — pick through the ones who you think are going to be the winners and losers based on fundamentals, and the market will tell you probably in the first quarter of 2019 who you want to own and who not.”

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The late October decline in cannabis has had a major impact on Canada’s markets in general, with the drop in pot stocks contributing to one of the worst months for the S&P/TSX Composite in years. The S&P/TSX Venture Composite was hit hard as well, with ten of its 15 biggest losers for October coming from cannabis.

At the same time, even with recreational cannabis up and running, there’s still a lot left to be determined about the industry, not just in Canada but in other jurisdictions like the United States and Europe where liberalization surrounding cannabis may further open up the industry.

Acker says that going forward, investors are likely to react swiftly to any missteps by companies in the sector.

“If they miss something, a sales cycle or whatever, the market will be brutal on these names,” he said.