How high can cannabis stocks go?

Calgary Herald - - FINANCIAL POST - KRIS­TINE OWRAM AND CRAIG GIAMMONA

Canada’s cannabis com­pa­nies are ex­pe­ri­enc­ing a rush of in­vest­ment that’s mak­ing even some par­tic­i­pants para­noid.

“You might ar­gue our valu­a­tions are a lit­tle bit ahead of our skis,” said Paul Rosen, chief ex­ec­u­tive of­fi­cer of Tidal Roy­alty Corp., which fi­nances weed com­pa­nies.

Til­ray Inc., a mar­i­juana com­pany val­ued at nearly US$9 bil­lion, cur­rently trades at a price-to-sales ra­tio of about 124. That’s more than 25 times higher than Ama­zon Inc. and Ap­ple Inc., the two most valu­able com­pa­nies in the S&P 500. And Canopy Growth Corp.’s US$11 bil­lion-plus mar­ket value is on par with Bar­rick Gold Corp.’s, even though the min­ing firm, with 18,000 work­ers, is ex­pected to post 20 times the sales this year as the 1,000-em­ployee cannabis com­pany.

“It’s still not a grown-up sec­tor by a lot of port­fo­lio man­agers’ stan­dards,” said Bruce Camp­bell, founder of StoneCas­tle In­vest­ment Man­age­ment Inc., which is launch­ing a cannabis-fo­cused mu­tual fund. “The valu­a­tions are off the charts if you use any type of typ­i­cal met­rics.”

As Canada pre­pares to le­gal­ize mar­i­juana on Oct. 17, the cannabis in­dus­try has soared from vir­tu­ally noth­ing five years ago to one with global sweep today.

Canadian com­pa­nies, such as Canopy, Til­ray, Aurora Cannabis Inc. and Aphria Inc., are lead­ing the way.

Global con­sumer spend­ing on cannabis is ex­pected to reach US$32 bil­lion by 2022, ac­cord­ing to U.S. firms Ar­cview Mar­ket Re­search and BDS An­a­lyt­ics.

Recre­ational use is now le­gal in nine states and the Dis­trict of Columbia, and coun­tries from the U.K. to Mex­ico are in the process of ap­prov­ing use of med­i­cal mar­i­juana. But a lot of cannabis in­vest­ing de­pends on the con­tin­ued march to­ward le­gal­iza­tion in the U.S., which is dif­fi­cult to hand­i­cap given grid­lock in Congress and At­tor­ney Gen­eral Jeff Ses­sions’s an­tipa­thy. Mar­i­juana re­mains il­le­gal fed­er­ally in the U.S.

The lat­est in­vest­ment frenzy re­ally got rolling last month when Con­stel­la­tion Brands Inc., the maker of Corona beer, an­nounced a US$3.8 bil­lion stake in Canopy. Since then, the BI Canada Cannabis Com­pet­i­tive Peers in­dex has gained 45 per cent. Large pub­lic com­pa­nies and in­sti­tu­tional in­vestors had largely avoided the mar­i­juana in­dus­try, fear­ful of run­ning afoul of U.S. law. Con­stel­la­tion’s in­vest­ment was seen as a val­i­da­tion.

The growth po­ten­tial in mar­i­juana has yet to trans­late into big sales or prof­its. Til­ray re­ported sec­ondquar­ter rev­enue of US$9.7 mil­lion. Aurora, val­ued at about US$6.4 bil­lion, had sales of US$12.2 mil­lion in its most re­cent quar­ter. In just the first two days of this week, Aurora’s stock rose 12 per cent and Til­ray was up 23 per cent.

Til­ray added an­other 11 per cent in early trad­ing Wed­nes­day to above US$100 a share, bring­ing its to­tal gain since its July IPO to over 500 per cent.

The mar­ket is ex­pected to grow af­ter le­gal­iza­tion, but that still might not be enough to jus­tify valu­a­tions.

“The in­vest­ment nar­ra­tive cen­tres on their abil­ity to use Canada as a home base from which they can ex­pand in­ter­na­tion­ally as the op­por­tu­nity grows,” An­drew Kess­ner, an­a­lyst at U.S. bro­ker­age Wil­liam O’Neil & Co., wrote in a re­cent note.

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