Analysts see potential bubble

Continued from FP1

The halts seem to have put the brakes on for overly enthusiastic investors as five of the six stocks closed lower. Many were halted again after seeing a similar tumble on their way down.

Canopy Growth — Canada’s largest marijuana company — was halted four times, after reaching a valuation of $2 billion, double its worth on Friday when it first reached the $1-billion mark for the first time.

That hefty valuation comes despite the fact the Smiths Falls, Ont.-based company has yet to report a profit and earned $8.5 million in revenue during the most recent quarter. Seen as a bellwether for the sector, the stock turned around to close 15.2-per-cent lower at $11.40. It was the most actively traded stock on the TSX Wednesday, with more than 24 million shares changing hands.

Vancouver-based Aurora Cannabis was the first to trigger the circuit-breaker after its stock price gained 46 per cent in the half hour after the opening bell. It was the only one to remain in positive territory at the close — up 11.8 per cent to $2.94.

The heightened volatility comes ahead of a Task Force on Marijuana Legalization report to be delivered at the end of the month, which will provide a roadmap for how the Liberal government goes about implementing a legal recreational marijuana market. The market, which could be worth as much as $10 billion, is expected to launch in 2018.

The share price momentum — despite the fact most of Canada’s licensed medical marijuana firms have yet to turn a profit — has some analysts asking if a cannabis bubble is on the horizon.

“I certainly wouldn’t be surprised if we’re seeing some sort of euphoric top today,” said Bruce Campbell, portfolio manager at StoneCastle Investment Management. “When they trade at this kind of volume and spike up like that and the valuations are sort of off the charts, it’s sort of indicative of that.”

Valuations are running wild as investors clamour to get into the suddenly desirable sector, especially after four U.S. states voted to legalize recreational marijuana during last Tuesday’s presidential election.

The legalization votes south of the border have made more investors pay attention to cannabis, said John Fowler, CEO of Torontobased Supreme Pharmaceuticals, which reached a new intraday high of $2.05 — a 60-per-cent jump from Tuesday’s close.

However, he added, they are reluctant to invest in stocks in the U.S., where the drug is considered criminal at the federal level, seeking out opportunities north of the border.

“We talked to many U.S. investors who get excited about the headline news in the U.S., research the market and realize that the only place in the world that you can safely invest in cannabis production and sale is Canada.”

Many Canadian companies have announced they’ve secured millions of dollars of funding in the past week, which is also “adding fuel to the fire”, said Khurram Malik at Jacob Securities in Toronto.