Pot stocks have been beaten down this year, which might make investors hungry for bargains to start shopping in cannabis, but don’t go there yet, says fund manager Norman Levine, who cautions that at this stage and with still no real earnings to speak of, there are no sound investments in cannabis.
For those who like a good story, the pot stocks have delivered in spades over recent years, starting with their meteoric rise in late 2017 when early favourites like Canopy Growth (Canopy Growth Stock Quote, Chart, News TSX:WEED) and Aurora Cannabis (Aurora Cannabis Stock Quote, Chart, News TSX:ACB) made headlines and tickled the curiosity of many a retail investor, prompting a weed frenzy that on more than one occasion caused discount brokerages at Canadian banks to break down from the traffic.
Then came the lead-up to legalization last fall which drove stocks higher and higher, spurred on by Canopy’s major partnership with global alcohol giant Constellation Brands which put a further stamp of legitimacy on the fledgling industry. And as anticipation grew on the launch of a new multi-billion-dollar industry, the collective market capitalization of Canada’s pot stocks soared into the tens of billions and cannabis companies saw the vaults open at the traditional banks, eager to throw money at operations talking a good game about millions of square feet of greenhouse space, growing capacities and, of course, revenues shooting into the stratosphere.
But even with a sizeable rally early in 2019, the wheels have now officially fallen off, with share prices over the past half year diving dramatically across the entire sector, with the bottom still not clearly visible.
For a quick snapshot of these ups and downs, take a gander at the Horizons Marijuana Life Sciences ETF, which tracks the North American cannabis space: By October of 2017, HMMJ was hitting $10 per share before climbing to a high of $25 by January, 2018. After a lull in the markets, the stock once again rose towards the October 2018 legalization date, reaching a high of $27.00.
But from early 2019 onwards, HMMJ has been all downhill and currently trades more or less where it started off, pre-boom, in the $8 to $9 range.
Google Trends tells a similar tale, with worldwide interest in both Canopy and Aurora rising in late 2017, peaking in October 2018 and then dropping off since, almost back to 2017 levels.
But the bursting bubble isn’t a sign that cannabis is dead. As Levine says, at the end of the day, there will still be a viable industry — it’s just that the pot companies have yet to figure out how to make any money from it.
“I wouldn’t touch any of the pot stocks yet. They still don’t trade on any valuation metric that makes any sense to me,” says Levine, managing director at Portfolio Management Corporation, to BNN Bloomberg on Wednesday.
“Basically, none of them make any money and they big guys have no idea when they’re going to be making any money. So, it’s hard to value these companies, and there’s going to be a big shake-out. There are still way too many participants in the market and nobody has brand names that anybody cares about yet. There are a lot of negatives out there,” he says.
Currently, the cannabis space is counting big time on the January release of derivatives such as edibles and cannabis drinks to spark more interest in the market, with these higher margin items adding more to the bottom line for cannabis companies.
Levine advises a wait-and-see approach, nonetheless.
“One day things will level out and there’ll be a time to buy these but I don’t think we’re there yet,” Levine said.
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