This fund manager explains why he avoided all pot stocks

Are you still holding pot stocks?

We’re now one year into legalized marijuana in Canada and while the country-wide roll out has been less than smooth, the general consensus is that the industry is headed in the right direction as legal pot sales begin to take a larger bite out of the black market.

But the same can’t be said for cannabis stocks, which have taken an awful beating over the past half year.

What’s an opportunistic investor to do?

Stay clear of the entire sector, says portfolio manager Richard Croft.

“In general, I don’t like marijuana stocks and I haven’t liked them right from the beginning,” says Croft, chief investment officer at Croft Financial Group, in conversation with BNN Bloomberg on Monday. “My argument was that they came out very aggressively and I think that the excitement wasn’t justified by their business models which suggested what they were going to do.”

“They got way ahead of themselves,” he says.

Certainly, the charts look awful for many of the pot stocks, with names like Canopy Growth (Canopy Growth Corp Stock Quote, Chart, News TSX:WEED) and Cronos Group (Cronos Group Stock Quote, CHart, News TSX:CRON) having lost well over half of their value in recent months. In many cases, the losses have taken share prices to levels last seen in the lead-up to the first pot boom of late 2017 and early 2018.

And while the pot boom did make handsome profits for institutional and retail investors alike, it’s the latter group that have played an oversized role in cannabis, with the float for many of the well-known cannabis companies both in Canada and the United States currently comprised of a much greater percentage of retail investment than seen in other sectors.

The retail presence has been a factor from the early days of the pot rush. Back in January of 2018, online brokerages for Canadian banks TD and RBC reported service outages due to the unexpectedly high trading volumes. And that retail love for cannabis has continued with the emergence of American pot-co’s now trading for the most part on the Canadian Securities Exchange. There, some companies are seeing over 95 per cent of investment coming from retail — an influence that is being blamed not only for the high volatility in the space but for the herd-like movement of stocks, where differentiation based, for example, on company fundamentals has yet to take hold.

“The stock price is driven by Canadian retail investors, and that Canadian retail investor is a fickle, ignorant investor that doesn’t really understand what they’re investing in,” said Jeff Mascio, CEO of Cannabis One Holdings, a Denver-based pot company, speaking to Bloomberg News last month.

The high retail presence is not the only concern, says Croft, who thinks that investors have been duped by promises of high profits linked to an industry which in all likelihood will be a low margin affair.

“I’m not against marijuana. My issue is that this is going to be a regulated entity in the same way that the liquor business is and if it’s a regulated entity like the liquor business, that’s the kind of returns that you can expect — and they’re not great in the liquor business,” says Croft.