More volatility forecast as pot plunges back to earth

Canadian cannabis stocks plunged Thursday to their lowest levels since December, and analysts covering the sector say investors should be ready for more volatility in the weeks to come.

The pain was widespread, with the Canadian Marijuana Index, which tracks 24 leading cannabis stocks, down more than 11 per cent at Thursday’s close.

Shares in Canopy Growth Corp. dropped below $30 for the first time since Dec 29, falling 11.19 per cent to $27.55, while other bigname producers Aurora Cannabis Inc. and Aphria Inc. fell 12.65 and 12.39 per cent respectively.

The steepest dive came from shares in Namaste Technologies Inc., a retailer of pot-related products, which dropped 21.71 per cent.

“Institutional traders and hedge funds are selling all the names, and once you get one name going down, they’re not going to discriminate too much,” said Chris Damas, author of the BCMI Cannabis Report. “This is an overbought sector.”

The industry has been trending downward for more than a week, and since Monday, the Canadian index has lost more than 20 per cent.

The pullback, however, is not causing too much concern among analysts, many of whom see the price drop as a return to reality.

“We’re closing in a round-trip from those levels in December, when things spiked for no fundamental reason, so there’s no fundamental reason I can point to for it to be undone,” said Russell Stanley, equity analyst with Echelon Wealth Partners. “Even with all the red that we’re seeing on the screen today, the peer group that we look at is still trading at almost 17 times 2019 EBITDA ( based on consensus estimates), so that’s still a very healthy growth multiple for the space.”

Daniel Pearlstein, an analyst with Eight Capital, says a reason for the pullback may be the “number of very large financings in the space over the last few weeks, and there was a lot of new capital issued that the markets have to churn through.”

Supply of new stock, in other words, appears to be outstripping demand, explained Martin Landry, managing director of equity research with GMP Securities.

Analysts were at odds as to how much this news was affecting the sector, with some suggesting it might be fuelling uncertainty about firms with U.S. exposure, and others noting that it should be seen as a positive measure from a risk perspective, at least for Aphria.