Norman Levine: here’s why the pot sector is faltering

We’re now two months into the era of legal weed in Canada and while the comedown from the initial October 17 start date was to be expected, the continued downward spiral of Canada’s marijuana stocks is perplexing. Will Canopy Growth and the rest regain their mojo anytime soon?

Not until an honest-to-goodness market develops, says Norman Levine of Portfolio Management Corp, who claims investors are now rightfully waiting to see real products, real brands and a fleshed-out industry before putting their money back in.

Shares of Tilray Inc. (NASDAQ:TLRY) jumped ten per cent yesterday on news that beer giant Anheuser-Busch InBev would be partnering up with Nanaimo, BC-based Tilray to develop cannabis-infused beverages. The deal will see Tilray and AB InBev’s Canadian subsidiary Labatt Brewing Company each investing US$50 million in the joint venture aimed at “staying ahead of emerging consumer trends,” according to Labatt president Kyle Norrington.

The news comes a couple of weeks after tobacco company Altria Group announced its intentions at securing a seat at the cannabis table by acquiring an initial 45 per cent ownership stake in Cronos Group for $2.4 billion.

Yet even with the flurry of deals, November and December have been bleak months for cannabis, a trend that’s well-represented by the Horizons Marijuana Life Sciences ETF (TSX:HMMJ), which tracks the North America cannabis sector and now sits 45 per cent off its October 16 high, and looks to be flirting with a 12-month low. Chalk it all up to cannabis entering its ‘Show me’ phase, says Levine.

“The whole marijuana industry has not been an exciting area to be for a while, even though you’re getting these announcements from Aphria, Cronos and Tilray,” says Levine, managing director for Portfolio Management, to BNN Bloomberg . “The reason is that this is a nascent industry, still nobody knows how things are going to work. There are no brand names that are recognizable that people are craving after. One company’s products aren’t being favoured to any great extent over anybody else’s. They’re doing
deals but nobody knows what it means.”

Levine points to the US$4-billion investment, announced in August, that alcohol company Constellation Brands would be making in industry leader Canopy Growth, arguing that deals like these are uncommonly speculative given the present lack of clarity in the pot market.

“What has Constellation actually done? They’ve put $4 billion into a company so that they supposedly would be able to have beverages [but] there is no beverage product yet,” he says. “They haven’t been able to come up with a formula where the stuff tastes any good.”

“So all of these companies are throwing money —some of it huge, in the billions— at companies where there’s no market yet, no product yet. Usually, you get money thrown at companies with brands that you want to buy or market share that you want to buy, and none of that is here,” Levine says.

“I still don’t get the excitement and the stocks are showing it. You’re getting little pops and then that’s it,” he says.