Canopy Growth is too risky right now, this portfolio manager says

But just like last year’s big run-ups in January and again towards the October 17 legalization date, there’s an awful lot of retail investment churning through the sector. Too much, says Ryan Bushell, president of Newhaven Asset Management, who argues that it’s still too early to pick the winners from the losers, even when it comes to an industry leader like Canopy.

These are (ahem) high times for marijuana companies what with valuations soaring and revenues beginning to come in from Canada’s adult-use market. More Canadian companies are gaining wider exposure through listing on American exchanges, meanwhile US pot co’s are having to make do with listing on Canada’s junior exchanges.

And whereas in the past, cannabis companies found it pretty much impossible to get the attention of the big banks and institutional investors, pot’s legitimacy is now at hand, with investment firms opening up their wallets and letting loose their analysts on the sector.

The situation was much different a year ago when hordes of retail investors were causing outages at online brokerages for TD Bank and Royal Bank due to the massive trading volumes, a FOMO-driven frenzy that, then, at least, had little to do with fundamentals within the yet to be born rec pot industry.

But investors should remember that cannabis is still very much in its infancy, Bushell warns, and these pot companies have yet to prove themselves worthy of your hard-earned money.

“There’s a lot of enthusiasm and there are a lot of people investing in companies who wouldn’t normally have their money in the stock market at all, let alone something very speculative, which all of these companies are at the present time. There is revenue out there and there is money being made but it’s way too early to tell if there are winners and losers,” Bushell said to BNN Bloomberg on Wednesday.

“If you look at Canopy specifically, they’re spinning off companies, they’re buying companies, it’s all with paper, there’s not a lot of real cash flowing around and so it would make me very nervous as an investor in this sector,” he says.

Earlier this month, Canopy Growth reported its financials for the quarter ended December 31, representing a first look at the company’s operations within Canada’s legalized adult use market. Canopy reported revenue of $83 million, beating analysts’ forecast of $81.2 million, while recording a loss from operations of $157.2 million. So far in 2019, the stock is up 72 per cent.

“I think that there is potential down the road for there to be sustainable, cash-flow companies but right now there’s way too much money chasing way too few revenues, in my opinion,” says Bushell.

“Everybody has a different risk parameter, but what I look for my clients and what I’m trying to do for them is provide a sustainable total return. I’d rather have five per cent for 30 years than 50 per cent for two years and have it all at risk again on the other side. It’s about sustainability and I don’t see that in this space,” he says.