Cannabis stocks are overvalued, Brian Madden says

Cannabis stocks have taken a beating over the last few months, with the drought hitting both heavyweight names like Canopy Growth and Cronos Group all the way down to smaller operations like True Leaf Brands and Indiva Limited.

But investors thinking that now’s the time to jump back into the space should do a reality check, says Brian Madden of Goodreid Investment, who argues that the pot stocks big and small are still priced too high.

“There is actual real money [in the cannabis sector], it’s not just retail speculation chasing the money now,” says Madden, senior vice president and portfolio manager at Goodreid, to BNN Bloomberg on Thursday. “Some of these stocks are in the TSX Composite, so ETFs are buying them and active managers are having to follow suit to some extent.”

“[But] we have avoided investing in the space because the valuations are egregious and by and large, most of the companies don’t have a very well-conceived strategy on how to really take their product to market and carve out that brand space for themselves. So we’re taking a wait-and-see, very cautious approach,” he said.

After a promising start to the year, cannabis companies both in Canada and the United States have seen their share prices plummet more recently. The Horizons Marijuana Life Sciences ETF, for example, which attempts to track the North American cannabis sector as a whole, climbed an astounding 65 per cent between January 1 and March 19. Since then, however, HMMJ has been sliding steadily and now sits up 28 per cent year-to-date.

Madden says the bigger names in the industry have fared better over the market’s ups and downs, simply because they’re getting the bulk of the media exposure.

“The market is sort of bifurcated in the marijuana space. The really big guys like Canopy Growth, Aphria and Aurora who seem to be staking out a differentiation strategy whether it’s through beverages or edibles or what have you or international expansion, they seem to be getting the lion’s share of the investor dollars,” says Madden.

“Then there’s the whole second or third tier [companies] that are starved for attention —and this is not unique to marijuana,” he says. “The same thing is happening in the mining space and in the oil and gas space.”

“This is an era of more and more money flowing to passive investments, which favours the large cap names that have heavier weight in the indices, so companies that might be fundamentally strong are sometimes going overlooked,” he said.

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