With the bubble clearly having burst on the marijuana stocks, investors may be thinking that stocks like Canopy Growth are starting to look cheap.
Not yet, says portfolio manager Alex Ruus of Arrow Capital Management, who claims there’s more downside coming to both Canopy and the pot space in general.
No doubt, Cannabis has had a horrible run over the past half year, with many of the well-known names seeing their share prices literally sliced in half. The causes are plentiful, starting with an overheated sector and investor patience that has worn thin with pot companies who have yet to deliver the high revenues and bountiful EBITDA that was promised in the lead-up to legalization in Canada.
There’s also been a slow as molasses roll-out of retail outlets across Canada, especially in Ontario where only 67 licenses have so far been granted in the country’s most populous province, which has now created a glut of product. Together, you have a recipe for a still-strong black market where users can keep getting their weed for much cheaper than at one of the scarce few legal sellers.
But the big issue for those of us looking to bet on pot is that most of the cannabis companies both in Canada and in the US, where buildout continues in states that have legalized either medical or adult-use marijuana, have no profits to speak of —and therefore should be of little interest to investors, who should be able to look at company fundamentals to separate the potential winners and losers.
That’s according to Ruus, who nonetheless gives the nod to Canopy as first among a dubious group of options.
“The first thing that you want to do is look at it from a sector [point of view]. This entire marijuana sector was the go-go sector for the last three years and now for the last six to nine months it’s been going in the other direction,” says Ruus, in conversation with BNN Bloomberg on Thursday.
“I would suggest that it’s going to continue for a little while,” he says.
“Out of the Canadian ones, Canopy would be the most attractive because they’ve got a lot of cash on their balance sheet thanks to the Constellation deal. That said, they’re losing money hand over fist right now,” says Ruus.
Over the past couple of years, many cannabis companies have taken up partnerships with established businesses in fields such as alcohol and tobacco and health and wellness but none with more fanfare than Canopy, whose $5-billion deal last summer with liquor giant Constellation Brands pushed the entire sector in high gear.
But Constellation’s discontent with the time it’s taking for Canopy to get its footing has been evident in recent months, starting with the firing of co-CEO and de facto industry spokesperson Bruce Linton and continuing with Constellation’s recent statement that it would not be making any more cash contributions to Canopy, after reporting an expected net loss of US$125.4 million on its Canopy investment over the past nine months.
Ruus says that investors should sit on the sidelines until the path to profitability with the pot companies becomes clearer.
“I think that the entire sector has more downside here, so I would continue to avoid the sector at the bare minimum until the end of the year because there’s going to be a lot of tax-loss selling over the next month,” Ruus says.
“There’s very little fundamental support for almost all of these stocks so you want to be very careful in this space,” he says.