Panning for gold among the rubble of Canada’s blown-apart pot sector?
That’s hazardous work, says investor James Hodgins of Curvature Hedge Strategies, but if you’re bound
and determined, sticking with a name like Canopy Growth Corp. (Canopy Growth Corp. Stock Quote, Chart, News TSX:WEED) might help.
Cannabis stocks across the board suffered big losses in 2019 as the proverbial bubble burst and many a retail investor took a bath on stocks that at the beginning of the year looked to be bonafide winners, Canopy Growth being one of them.
Canopy’s share price hit a low of $18.23 last month, a far cry from the $70 highs of this past spring when hopes were still high that Canada’s cannabis rollout would generate gobs of cash for licensed producers like Canopy who spent hundreds of millions building out infrastructure and growing as much product as possible.
But reality set in for Canopy in June when it was announced that co-CEO and industry cheerleader Bruce Linton was forced out of the company by majority investor, US alcohol giant Constellation Brands, who reportedly had grown impatient with Canopy’s soaring expenses and too-slow revenue ramp.
Linton’s firing was the shot heard ‘round the grow op and cannabis stocks across the sector began to sag in response to waning confidence. Slow provincial roll-outs of cannabis retail operations didn’t help, with Ontario’s tiny store numbers causing a glut in product and leading many to think that conquering the black market —where illegal pot is still almost half the price of legal weed— would be a lot harder than previously anticipated.
“Boy, after all the hopes and dreams of legalization it turned out to be a real ‘sell the news’ type of thing in the space,” said Hodgins, president and CIO at Curvature, to BNN Bloomberg on Monday. “I think that with the Ontario government opening up the new stores that will help. That said, the space has just been a disaster.”
“If you look at wholesale prices for marijuana they’re not good, so the supply-demand out there on the street is still not good for these companies. We’ll see. If the US really does open up then that will be a positive catalyst because they are making inroads into some of the US [multi-state operators],” he said.
Hodgins’ praise for Canopy was muted, at best, saying, “I think Canopy will ultimately be one of the survivors in the space. They’ve got something like $2 billion left in cash and Constellation put $5 billion into it two years ago so they’re chewing through it at a pretty good pace. We’re not an owner and I don’t think that we’re short this particular one right now, but it’s not a space in Canada that we’re fond of at this point.”
Hodgins says that his firm has made money on shorting cannabis although the borrowing rates on a name like Canopy are around 25 per cent while others are “much higher.”
“It’s expensive but we do look for names in the space where the borrow rates are lower, for sure,” he said.