Pot stocks will fall even further if the market does: fund manager

Already pummeled into the ground by unfriendly market and regulatory conditions, Canada’s pot stocks could take another major hit if and when an overall downturn in the market occurs.

That’s according to John De Goey of Wellington-Altus Private Wealth who says that marijuana likely won’t be immune to further downside if and when the market drops.

Cannabis has been in the doghouse for a number of months now as investors have decided to pop the bubble on the once high-flying sector. Names like Canopy Growth (Canopy Growth Stock Quote, Chart, News TSX:WEED), Tilray (Tilray Stock Quote, Chart, News Nasdaq:TLRY), and Aphria (Aphria Stock Quote, Chart, News TSX:APHA) have taken it on the chin over the past six months, with recent quarters in some cases showing declines in revenue where expectations were for monumental growth.

Industry has put the blame at the feet of federal and provincial regulators who have been slow to roll out cannabis retail stores while at the same time hamstringing producers with strict rules around packaging and branding. Now, a glut in supply has decimated wholesale prices, leaving gaping holes in LPs’ bottom lines and causing many operations to halt expansion projects as available capital in the sector has shrunk to nil.

And while a new year brings new hope, for Canada’s pot stocks it comes in the form of soon-to-be-available derivative products like edibles, topicals and beverages, all higher-margin items that could spark renewed interest in the sector.

But whatever gains might come from selling chocolates and gummies won’t keep cannabis companies from feeling the pain of a general market slowdown, a scenario that seems to loom ever larger as the current bull run stretches past the ten year mark.

“My view is that if the market does drop in a significant way —and the traditional standard for a bear market is 20 per cent, so let’s say 20 per cent— there are very few sectors or individual products that will survive that without going down significantly,” said De Goey, portfolio manager at Wellington-Altus, who spoke on BNN Bloomberg on Monday.

“Some will go down ten per cent and others will go down 30 but most will go down 20 per cent if the market goes down that much. I don’t really know where you put the marijuana sector. Right now, there are four or five ETFs to play that [but] I would expect it to do the same as the market, about 20 per cent. All marijuana ETFs have had that kind of a chart of the past seven or eight months,” De Goey says.

The Horizons Marijuana Life Sciences ETF, which tracks the North American cannabis space in general, hit a high of $27.00 back in October of 2018 when adult-use cannabis first became legal in Canada. But the stock has been on a steep decline since March of 2019, losing 65 per cent of its value in the process.

Currently at $8.28 per share, HMMJ is back where it started in the days prior to the pot boom of late 2017.