Pot investors ride highs and lows of stock prices
Rob Armstrong, an oil camp chef living in northern Alberta, plunked $37,000 of his savings into marijuana stocks a year and a half ago. He’s quadrupled his money.
Retail investors like Armstrong and larger institutional players have been getting rich from the high-stakes game of betting on the peaks and valleys of cannabis stocks.
From his home in tiny Lac La Biche, Armstrong has become an avid student of pot stocks, companies and news to plot his investing strategy. His portfolio has reaped big profits, but there have been gut-wrenching losses along the way.
“Every time Trudeau talks about it on TV, the shares climb,” said Armstrong, who spends 80 hours a month studying the market. “Little things either put this industry into a frenzy or into a downturn, just with a snap of the finger.”
After plummeting from all-time highs last spring, the stocks appear to be riding another spike. Armstrong expects a rally into November, just like there was last year, when a fury of trades sent stocks soaring before a broad sell-off helped cause another collapse.
As investors ride this rollercoaster, an index of 18 Canadian pot stocks has jumped 24 per cent in less than two months, though some companies have seen their share prices rise much higher.
One analyst raised doubts that parallels could be drawn with last year’s surge, noting different factors are moving stocks this year, which could lead to different outcomes.
Canada’s marijuana industry has raised well over $1.7 billion since 2014, when federal rules shifted production of medical cannabis to commercial growers, according to Greg McLeish, an analyst at Mackie Research.
The pace of investment has increased dramatically as Canada prepares to become the first G7 nation to legalize pot. In the past two weeks alone, five producers have announced intentions to raise well over $200 million as they seek expansions amid fears of supply shortages when recreational sales become legal next July.
As investors chase the big green rush, they’re not just pursuing the promise of a new industry, with forecasts of billions in annual sales, they’re also seeking riches from surges in stocks.
“There’s lots of people trading these stocks and making a gazillion dollars on both the ups and downs, but it’s because there is this huge … opportunity ahead of us,” said Bruce Campbell, founder and portfolio manager of Kelowna-based StoneCastle Investment Management Inc.
Pot stocks typically rise and fall in connection with broader events, such as government announcements,rather than the performance of individual companies, which has far less influence on share prices than it does in other sectors.
The cannabis industry had been stewing in disappointment for much of the summer after premiers warned of potential delays in implementing recreational markets across the country, analysts said. But provincial governments have been releasing plans to manage the industry in recent months, beginning with Ontario in early September, when it outlined ambitions for a publicly run retail network of 150 stores by 2020.
Even though the Ontario plan was criticized within the industry, which favours private retail outlets, share prices generally started to climb with the announcement, according to the index of 18 Canadian stocks.
More provinces, including Alberta, followed suit releasing new details of their legalization plans, which “lit a fuse” by signalling to investors that governments were preparing for July 1, Campbell said.
“(Investors could) see where all of a sudden there’s going to be a shortage of supply of marijuana, and that all of these existing (producers) are going to do really well in the shortterm,” he said. “So let’s buy these things before they run away.”
Many Canadian pot stocks have been heating up since early September, including Ontario grower CannTrust Holdings Inc., which saw its share price double to $4.63 each in less than two months.
While a few stocks have lost ground, others gained by 13 per cent to 60 per cent, with Alberta grower Aurora Cannabis Inc. sitting near the low end with its share price rising 35 cents to $2.85 apiece.
Supply and demand of shares have also played into the peaks and valleys of stock prices, Campbell said, noting a recent dip came after several companies issued shares.
When stock prices fell last spring during a massive sell-off following the Trudeau government’s announcement of its plans for legalization, Campbell said his investment firm reduced its holdings.
“We knew there was going to be some news flow into the fall; we started picking up some of those stocks before they started to move; then as they started to move, we added more,” he said.
“In a lot of cases we sold higher and bought it back cheaper. Now they’re up 20 or 30 per cent from when we were picking them up in the summer.”
The rush to riches in Canada has drawn interest from investors south of the border, where cannabis remains federally illegal, despite a rising number of states that have approved medical and recreational use.
Jason Spatafora, a Florida investor who has dubbed himself the Wolf of Weed Street, said he noticed after watching the market in 2013 that pot stocks are “event-driven equities,” meaning price swings are fuelled by external forces.
After the value of his portfolio spiked by a couple thousand per cent in a few months, Spatafora also began to realize cannabis stocks appear to follow a similar pattern where they’re “firing on all cylinders” from October to April, with seasonal dips in December and the summer.
This spring, after Canadian share prices surged to record highs days before Trudeau announced his plans for legalization, Spatafora said he sold off most of his holdings, taking six figures in profit.
The shrewd play was no fluke, he said. He knows full well how quickly the market can turn.
“When I held (onto shares) I saw a portfolio of close to $700,000 get whacked in a day; I saw $300,000 in gains evaporate, literally in an afternoon,” he said.
Ron Stevens, a cannabis investor who splits his time between Philadelphia and a town on Florida’s south coast, has also made significant windfalls by knowing when to hold and fold.
Stevens took $300,000 in profit from his holdings last April and believes “we’re at the beginning of a new cycle that potentially could lead up to legalization in July.”
Canadian producers, he said, are largely the “only game” worth investing in across North America, given federal prohibition in the U.S. But he plans to liquidate most of his investments well before July 1, thinking “the real money will have been made by then.”
“There’s going to be a rally, a big rally, in my opinion; whenever that rally happens, I’m going to sell into it,” Stevens said.
“It would be crazy to hold these stocks into the legalization date, because in my opinion there’s just too much exuberance and too much anticipation.”
Back in Lac La Biche, Armstrong said he has earned $113,000 in profits over 18 months from pot stock trading, but he hasn’t withdrawn any of the windfall, keeping all of it in play.
As a first-time investor, he’s faced some disappointing bouts, including a “10-day slaughter” last November when stocks hit a peak before tanking, wiping out 30 per cent of his investment value.
Armstrong said he read the tea leaves correctly in April when he liquidated most of his holdings before stocks plunged, though he admitted he began buying stock again in May, before the market reached bottom.
Having taken his lumps, he’s not prepared to grab his money and run any time soon. “I’m just going to keep rolling,” he said.
It would be crazy to hold these stocks into the legalization date, because in my opinion there’s just too much exuberance and too much anticipation.