CANNABIS INVESTORS GET HEALTHY DOSE OF VOLATILITY
POT STOCKS PLUNGE TO LOWEST LEVELS SINCE DECEMBER
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 big-name producers Aurora
Cannabis Inc. and Aphria Inc. fell 12.65 and 12.39 per cent respectively.
The steepest dive came from shares i n Namaste Technologies Inc., a retailer of cannabis related products, which dropped 21.71 per cent.
“Institutional t raders and hedge funds are selling all the names, and once you get one name going down, they’re not going to discriminate t oo much,” said Chris Damas, author of the BCMI Cannabis Report. “This is an overbought sector.”
The whole 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 roundtrip 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,” he added.
One reason for the pullback may be the recent flood of financing deals, said Daniel Pearlstein, an analyst with Eight Capital. There were “a 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,” he said.
Supply of new stock, in other words, appears to be outstripping demand, explained Martin Landry, managing director of equity research with GMP Securities.
“There’s been more than $ 1 billion raised in January for cannabis producers ... so it’s sucked a lot of demand. It is healthy, in a sense, to see a pullback, it brings back a new wave of investors for the next leg up,” Landry said.
There could be other factors contributing to Thursday’s drawdown. Aphria announced in a press release, shortly before noon, that it was “considering strategic alternatives with respect to its U. S. cannabis related interests, including the possible divestiture of its investments.”
Analysts were at odds as to how much this news was affecting the sector, with some suggesting it might be fuelling uncertainty about companies with U. S. exposure, and others noting that it should be seen as a positive measure from a risk perspective, at least for Aphria.
Some analysts pointed to another potential drag on prices: on Wednesday it was reported that a U.S. cannabis fund, ETFMG Alternative Harvest, which has raised more than US$ 350 million since launching in late December, is being reviewed by U. S. Bancorp, the custodian bank that holds the ETF’s assets. If Bancorp decides against continuing its relationship with Alternative Harvest, the fund could face closure.
“To some extent people attributed that spike we saw at the very end of December to the arrival of that fund, and the interest that it drove and the buying that it had to do in various cannabis names. I think now we’re seeing the fear that maybe if something happens to that fund we’re seeing that get undone,” said Stanley.
Whate ver f ac t ors are causing t he drop, stock prices may well continue to decline, at least in the short term. Jason Zandberg, analyst with PI Financial Corp., estimates we still have “10 to 15 per cent declines to go before the market settles.”
According to Landry, the next few days and weeks could be volatile. But, he added, “we have a lot of catalysts coming up in the next month when the provinces announce their suppliers. I think this is going to be perceived extremely positively.”