The heat may be on Canada’s cannabis companies who have so far failed to deliver on profit promises but it’s early days yet and there’s little to distinguish the bona fide contenders from the field of also-rans.
Just wait until brand strength starts to show up, says Jay Bala of AIP Asset Management, then we’ll all know who the pot space winners are.
Marijuana stocks are flat to declining this week after showing promise over the last stretch of November.
The uptick was a bit of respite from the relentless clobbering that the sector has taken since early spring as markets take out their frustrations on companies whose struggles speak both to the newness and growing pains of an industry that little over a year ago was still a black market-only operation.
Shares of companies like Canopy Growth Corp, Aurora Cannabis and Village Farms International have all lost well over half of their value in recent months and in some cases are down 70 or 80 per cent from highs set earlier in the year.
But all that destruction could mean opportunity if you can pick the right pony, says Bala, who compares the pot sector’s immolation to the tech bubble of two decades ago.
“I would say, always go digging for value where there is carnage, and if you look at the whole cannabis sector, they’ve gotten absolutely crushed. I think that this is a great time to pick through the mess and say, ‘How many of these companies are legitimate companies? How many of these were great companies that just got crushed by a downward market trend?’” said Bala, senior portfolio manger at AIP, speaking to BNNBloomberg on Wednesday.
“It’s sort of like the Internet back in the day —if you had bought Amazon in 2002, you would have done great, but you would’ve had to have gone through 100 companies and said, ‘All of these other ones are terrible, for these following reasons, but here’s the one that I want to own,’” he says.
Bala says he likes the look of cannabis drug developer Tetra Bio-Pharma, whose stock has shot up over the past two weeks.
“We recently invested in Tetra Biopharma, a tiny company, and its stock has really run because we looked into it and said, ‘Look, in reality what you are is a biotech company. You had a whole bunch of other brands like consumer brands or whatever,’ and so we helped them basically spin out all their non-core assets. We only closed the deal in the past three or four weeks but that stock has doubled [since],” Bala said.
Want some advice on sifting through the rubble of cannabis companies? Bala says to look for the ones likely to have the strongest brands.
“At the end of the day, what you want is the brand and whoever has the brand will win this game. You look at straight consumer products, whoever is the Budweiser, the Heineken, that brand wins,” he said.
“The problem [in cannabis] right now is that everybody sells Budweiser — there’s no differentiating, nobody’s got a specialty brand. If you talk to a person who smokes cannabis as a recreational user, nobody says, ‘This is the brand I need.’ With alcohol, people are very brand-specific,” Bala said.
“You pick the company that’s going to become the brand, that’s your home run,” he says.