These two pot stocks are in trouble, this fund manager says

FOMO? You may be suffering from fear of missing out again this year when it comes to the marijuana stocks, which began 2019 by tearing up the charts, many of them gaining more than 50 per cent in value over January and February alone.

But those who have resisted the urge are likely better off for it, says portfolio manager Allan Meyer of Wickham Investment Counsel, who claims there are a lot of duds in the sector.

So far it’s been a banner year for the marijuana stocks, which although cooler in recent weeks have amassed incredible numbers over 2019. And investor interest in the space remains high as Canadian companies work to get their footing under a newly opened up sector, while cannabis companies in the United States continue to grow within still-evolving legal environments. Sector leaders such as Canopy Growth and Aurora Cannabis , for example, have posted impressive gains of 78 per cent and 74 per cent, respectively, while the Horizons Marijuana Life Sciences ETF , which attempts to track the marijuana sector as a whole, is up 45 per cent.

But investors should be looking past those sparkling gains as well as the eye-popping revenue predictions, says Meyer, who predicts that there will be a lot of carnage ahead in the Wild West of cannabis.

“We apply a safety and value filter and these guys are about as far away from safety and value as you can get,” says Meyer, to BNN Bloomberg last Thursday. “This starts off with revenue. We see these companies as having very modest revenue, especially when you look at their market capitalization. One of the largest companies, Canopy Growth, has something like $60 million in sales and it’s a multi-billion dollar company.”

“The expectations are of revenue growing six times, ten times or more for some of these companies, and to justify their share price you need to see this growth, but so far, we’re very nervous because we look at cash flow and these guys are burning up cash like crazy,” he says. “They’re developing their infrastructure so that they can grow the plants, their greenhouses and distribution, and they’ve done a poor job so far. So those revenue and growth numbers are really questionable.”

POT STOCKS IN TROUBLE

Meyer mentions Canopy as one of the likely survivors once the cannabis industry matures but that others like online cannabis retailer Namaste Technologies and Origin House (formerly CannaRoyalty), look problematic.

“With the negative cash, some of these companies, like Namaste, they’re going through $16 million worth of revenue cash flow and they’ve got cash only of $26 million. You cannot continue to do that for a very long time,” he says. “CannaRoyalty is another one I would watch very, very carefully because they’re burning through their small cash hoard, we’re showing that they’ve got a very small level and their cash that they’re burning is much, much larger.”

“There’s going to be a lot of consolidation [and] there are some duds in there, for sure,” he says. “You want to be very, very careful what you’re buying.”