Nov 18, 2016
Marijuana stock euphoria: Should you join the wild ride?
By Andrew Bell
Investors in Canada’s nascent market for legal marijuana saw stock prices swing wildly this week – and weed growers were delighted to exploit the frenzy by raising tens of millions of dollars.
But beyond this week, what does the future hold for Canadian pot producers? The industry is not only gearing up for the Liberal government’s legalization of the recreational marijuana market, but also grappling with what is happening south of the border.
Last week, California, Nevada, Maine, and Massachusetts voted to legalize recreational marijuana but it’s unclear what tack U.S. President-elect Donald Trump will take on cannabis.
“With these things [marijuana stocks] so hot right now, you have to really be careful,” Bruce Campbell of StoneCastle Investment Management said on Market Call. “If I was buying, it certainly wouldn’t buy in one big chunk.”
WEED’S WILD WEEK
Shares in Canopy Growth Corp (CGC.TO), which says it sold more than a tonne of weed in its latest quarter and harvested 1.7 tonnes, soared from $9.34 a share last Friday to almost $18 this past Wednesday in frenzied trading. On the same day, halts were triggered on several Canadian cannabis stocks. By Friday morning, Canopy shares dropped to $13.59, still up 45 per cent on the week and representing a market value of $1.5 billion.
Aurora Cannabis (ACB.V) – whose “garden is home to thousands of happy plants growing in the foothills of the Canadian Rocky Mountains, sipping fresh mountain water in gentle breezes and basking in ideal lighting conditions” – closed at $2.12 last week, jumping more than 50 per cent to $3.37 a share this Friday.
Meanwhile, shares in Aphria Inc (APH.V) climbed from $4.64 last week, to hit $6.41 on Friday.
TRUMP’S EFFECT ON POT
Investors betting on the advent of a large recreational market in Canada should see weed stocks move higher over the next year, but there will be big price swings on the way, Khurram Malik of Jacob Capital Management said.
“It’s risen a little too quickly for our comfort,” Malik said in an interview with BNN on Thursday.
"Yes it's a speculative sector, yes it's a high-risk sector, yes it's a highly volatile sector. But if you’ve got a two- or three-year investing horizon it's not a bad time to get in [on marijuana stocks].”
Investors will also have to weigh the implications of how marijuana regulation develops in the U.S.
While U.S. president-elect Donald Trump has said states should be allowed to decide their own cannabis policies, he’s also a close ally of Rudy Giuliani. The former New York City mayor is said to have presided over the transformation of the city into “the marijuana arrest capital.” And, Vice President-elect Mike Pence has backed tough punishment in Indiana.
Canopy Growth chairman and CEO Bruce Linton told BNN that the continued federal ban south of the border means his company has a powerful competitive advantage because it will let Canopy lock up intellectual property.
U.S. producers will remain “fractured and fragmented… they can’t patent and they can’t trademark,” Linton said.
He added that Smith Falls, Ont.-based Canopy has valuable technical knowledge and strong brands such as Tweed, which it touts as “approachable and friendly, yet reliable and trusted.”
But Commodities guest Chris Damas, publisher of the BCMI Report, warns that U.S. growers have plenty of expertise.
“Methinks they are pretty good at growing marijuana down in California and even in the wetter climes of Washington, Oregon and Colorado,” Damas said in an email to BNN.
“Recreational cannabis legalization in the four states that voted for it last Tuesday has nothing to do with Canada, except as a potential competitive threat. That market is already being satisfied – either illegally, or via co-ops.”
Still, investing in makers of the drug may be too much to stomach for some investors.
Gordon Reid, president and CEO of Goodreid Investment Counsel, told BNN in an interview on Thursday that he's avoiding marijuana stocks, partly because they carry too much social stigma for many of his clients.
“Just as with cigarette smoking and other socially sensitive issues we want to be on the right side and we feel we have made the right decision,” Reid said.
WILL THE EUPHORIA LAST?
Meanwhile, in time-honoured fashion, executives in this hot sector have been quick to take advantage of investor interest.
Supreme Pharmaceuticals (SL.CD) sold $50 million worth of convertible debentures garnished with share purchase warrants exercisable at $1.70 per share for three years. As of Friday, its stock traded at $1.81. The debentures are convertible at just $1.30 a share.
OrganiGram Holdings Inc. (OGI.V) sold 9.9 million shares at $3.55 for proceeds of $35 million. The shares traded at $3.88 on Friday.
Aphria last week sold $35 million worth of stock at $4.
Damas of the BCMI Report warns that the euphoria may not last, especially when Trudeau actually unveils his legalization scheme.
“The overblown potential of the ‘recreational’ cannabis market potential misreads Justin Trudeau and the Liberals’ intent. Trudeau has repeatedly stipulated that decriminalization has been proposed to make cannabis LESS available, not more, especially to youths,” Damas said.
He adds: “Position disclosure: We do not own cannabis stocks presently.”
WEIGH IN
