Canada’s decision to legalize the recreational use of cannabis has allowed the rise of an emerging investment market. The cannabis public sector has become one of the most followed industries for investors.
As such, the Investing News Network brings investors a collection of stories on the critical transition and its impact on the public markets.
A lot of predictions have been made for how exactly the market will react to the legalization of adult-use cannabis and where the money will be moving.
A massive sell-off has gained steam as the popular prediction for what investors are thinking as the Canadian market is set to enjoy a boost from interest all around the world.
The Investing News Network (INN) asked a round of experts for their opinions on whether the sentiment is moving towards buying, selling or holding these pot stocks.
Charles Taerk, president and CEO of Faircourt Asset Management
Taerk, who also acts as a sub-advisor to the Ninepoint Alternative Health Fund, told INN the market has had investors getting cold feet regularly and selling early. He predicted this again could happen the month after legalization.
The executive said he views those selling times as an opportunity for their fund to add for a long term play.
“We’re long term focussed and we use any opportunity for weakness as a buying opportunity. We see this market as a growth story for the next five to 10 years, so our focus is on those companies that are going to be producing successfully over a long period of time,” Taerk said.
Taerk expressed concern for the breakdown of companies able to meet the demands of supply agreements with provinces.
He expects some companies to incur the services of fellow licensed producers (LPs) to purchase additional product.
“Which means that their costs of production are higher than others and this is where we are starting to see a real separation with those companies that do have inventory and do have efficient production are gonna start to move to the fore,” Taerk said.
It’s going to increasingly become a discussion about earnings, so there is going to be a lot of separation we see in the next four to six months.”
Like his fund, Taerk sees the cannabis play as a long term one with plenty of catalysts still to come for the space.
Everett Knight, portfolio manager with Matco Financial
Knight said he expects to see a lot of retail money selling on legalization day on Wednesday (October 17). The manager cautioned investors need to remember, despite the rush and excitement, this is still an emerging market early in its process.
“Just like any industry, we see companies that are overvalued and lots of companies that are still undervalued,” Knight said. “Cannabis investors will have to become more sophisticated and not paint the whole industry with same brush to make better returns.”
Knight said most of the questions he’s getting from potential investors in the cannabis space is whether or not they have missed out.
“My answer is a definite no! However, investors have to be careful of just buying a handful of the highest valued names in the space,” Knight said.
He expects the next three quarters to deliver the results investors need in order to start separating meaningful revenue in the space.
Knight is also concerned about how much actual cannabis will be available for the legal market.
A new joint report from the University of Waterloo and the C.D. Howe Institute shows the supply of cannabis in Canada will reach 210,000 kilograms in the first year of legalization, well short of the estimated demand of 610,000 kilograms the data puts forward.
“People aren’t paying enough attention to the undersupply in the industry day one. LPs are already behind on their provincial contracts and it is far worse than we expected,” Knight said.
Greg Taylor, portfolio manager with Purpose Investments
Taylor also acts as the active manager of the Purpose Marijuana Opportunities Fund (NEO:MJJ). His fund has found success in the pockets of volatility through its active management.
When asked about the potential for a rush come legalization, Taylor said he viewed the blitz following Constellation Brands’ (NYSE:STZ) second investment deal into Canopy Growth (NYSE:CGC,TSX:WEED) as that euphoric move.
“That’s what really woke up the US retail investors… I think that last move we had in September was all US retail and some global investors coming in,” Taylor said.
It almost feels like we got that euphoric move already, it almost feels like [October] 17th is going to be more of a non-event.”
Taylor expressed concern for how much attention the legalization effect will get on day one by way of showing lines of people eager to buy product, since Ontario, arguably the biggest Canadian cannabis market, will have no physical retail shops until 2019.
“I think we can see another wind of excitement come once we can actually start to get some numbers and figure out who actually is making some money,” Taylor said.
Mark Noble, senior vice president of exchange traded fund (ETF) strategy with Horizons ETFs
Noble said investors should get ready for a depression period right after legalization. The ETF executive said investors need to “brace themselves for a little bit of disappointment,” following legalization.
Still, Noble did also express a bullish sentiment for where these stocks are headed.
“What’s occurred is we are betting on potential… within let’s say six to nine months, we’re going to start actually seeing revenues of who’s being successful at selling marijuana to the recreational public. [N]ot everyone is going to be a winner.”
The promise of cannabis companies becoming global players with entries into several markets beyond the adult-use sales is enticing to Noble, who said in the long term those gains could be “exponential.”
Noble suggested the Canada recreational market is already accounted into the price of the stocks, but he sees potential for increases as companies gain options on the global scale.
“Canada is only really round one in the global legalization story and I think where people have not looked to the same degree is in the opportunities that exist outside of Canada,” Noble told INN.
Don’t forget to follow us @INN_Cannabis for real-time news updates!
Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.