Cannabis stocks continue their wild price gyrations this week with sector leaders Canopy Growth Corp, Cronos Group and Aphria all dropping sharply after posting strong gains over much of January.
That’s par for the course, says portfolio manager Colin Stewart of JC Clark Limited, who argues that investors willing to take the risks may be better served by American pot companies than the Canadian ones.
“We just have a tough time getting our heads around the valuations for these cannabis companies, at least the Canadian-based ones whose share prices have rallied a lot,” said Stewart, CEO of JC Clark, to BNN Bloomberg Tuesday.
“The valuations relative to the demand opportunities here in Canada seem to be at pretty extreme levels. I think that some of the US-based companies that have a far bigger market opportunity and seem to trade at somewhat lower valuation levels are perhaps a little bit more interesting,” he says.
In terms of market capitalization, Canadian-based pot co’s outpace their US counterparts by a wide margin, but while the US market is more fractured due to cannabis’ federal Schedule 1 status, American companies can still reach wide markets either by being multi-state operators or focusing on larger states like California and Florida. And where Canada’s medical marijuana industry has been up and running for almost two decades, medical markets in states like Florida are still in their infancy.
“Canada is a market of 36 million people and we’re a market of 320 million people,” says Boris Jordan, chairman of Curaleaf Holdings (CSE:CURA), to CNBC last October as his company made its IPO. “There’s no justification in my opinion for the types of valuations we’ve seen in these Canadian stocks and it’s because they have little floats and a huge demand whereas the US companies are much better value from an earnings perspective.”
Exposure seems to be a big hurdle for US-based operations, as investors currently have only Canadian-based companies listed on the US exchanges, while, paradoxically, US companies have been forced to list on Canada’s junior exchanges.
“The biggest travesty is that we’re a $4 billion company that had to go to Canada to raise $400 million —we couldn’t do it in our own market whereas the Canadians, not only can they raise money in their own market, they can come here,” Jordan said.
Interest in Canadian and American cannabis stocks over the past year has travelled apiece, however, with companies in both markets seeing their share prices spike over September and October, then fall back just as sharply over November and December, only to rise again starting in January.
Ultimately, it’s those types of price movements that should constitute a warning to investors, says Stewart.
“You have to have an understanding that there’s an element of speculative behaviour reflected in the valuations on these stocks,” he says.