Get out of pot stocks, this fund manager says

Get out of pot stocks. That’s what one fund manager thinks investors should be doing right now.

The dog days of summer have been a desultory affair for companies in the marijuana sector, with bad news emerging on a number of fronts and the pot stocks continuing their collective slide unabated.

But the sad scenario playing out is really no surprise, says Ryan Bushell of Newhaven Asset Management, who thinks the chickens are coming home to roost for cannabis companies still showing no signs of profitability.

“There’s the potential for write-downs on goodwill,” says Bushell, president at Newhaven, in conversation with BNN Bloomberg Thursday. “The party was on during the past couple of years with lots of capital flowing into the space. That fueled a lot of acquisitions and acquisitions without revenues which was all goodwill, the value of the future.”

“Now as the stocks start to slide that goodwill becomes a bigger percentage and the impairment tests from the accountants are going to be pretty stringent,” he says. “You could see this spiral of goodwill write-downs which create more write-downs, and unless there’s revenue and profitability to prop up the share prices — which we seem a long way away from — the speculation that ran to the upside will also run to the downside. I would be concerned.”

“If you’ve still got some green on your screen from profits you made in the sector or even just slight losses, I would really consider moving that money…”

What a difference a few months makes. Earlier this year, the pot stocks were on a collective high, with names like Canopy Growth and Cronos Group essentially doubling in value between January and March. The Horizons Marijuana Life Sciences ETF (TSX:HMMJ), which tracks the North American cannabis sector, was also climbing, as investors clamoured to not only support Canadian companies but also their counterparts in the emerging US cannabis scene.

All was not to be, however, with the downturn starting in late March and aided by dismal quarterly numbers from sector leaders like Canopy, which ousted its CEO Bruce Linton, the de facto mouthpiece for the industry as a whole, seemingly on impatience from the board on a timeline to profitability. Next came a scandal from CannTrust Holdings (TSX:TRST), once considered one of the more professional outfits in the space, and a FDA crackdown on US pot company CuraLeaf Holdings (CSE:CURA), a leading multi-state operator.

The result has been a growing pessimism about cannabis, one rooted in realism, according to Bushell, who sees a glut coming in cannabis production.

“It’s a huge risk. The supply is going up and the demand is sort of just ticking along,” he says. “[Demand] may go parabolic some day but to me the cultural acceptance of marijuana is still a ways off in terms of the general consumer consuming marijuana on the same quantity as they would beer, spirits and wine.”

“When you actually look at the financial statements and what’s actually going on here and what the company’s value is made up of, you can’t just build facilities like they’ve been building and not have any profitability coming in a reasonable amount of time to pay off those investments,” Bushell says.

“If you’ve still got some green on your screen from profits you made in the sector or even just slight losses, I would really consider moving that money,” he says.

So far in 2019, HMMJ remains up four per cent, while for the past 12 months, the stock is up 76 per cent.