POT STOCKS TAKE A HIT.
The excitement that saw lines form outside retailers’ doors on Day 1 of legalized cannabis in Canada wasn’t matched in the market as the country’s major pot firms saw their shares slide on Wednesday.
The biggest decliner was B.C.-based Tilray Inc. which saw it s shares fall 6.39 per cent to close at US$148.25 on the Nasdaq in New York.
Others that slid included Canopy Growth Corp.,
which fell 4.27 per cent to close at $65.76 and Aurora Cannabis Inc., which dipped 2.93 per cent to finish at $13.57, both in Toronto.
Aphria Inc. appeared to be the outlier as it rose by 3.79 per cent to close at $19.40, also in Toronto.
While some had speculated legalization might bring a new boom for share prices, Stuart Rolfe, an investment analyst at Veritas Investment Research, said that was never going to happen.
“I don’t think there was any doubt that legalization was going to occur and so therefore it’s not really what we call a catalyst for further upside,” Rolfe said.
The weak performance Wednesday comes after shares in cannabis companies had already slumped on the eve of legalization. On Tuesday, Canopy, Aphria and Aurora each saw their share prices decline by more than six per cent.
While most analysts still maintain buy recommendations for pot stocks, Rolfe wrote a report last week calling for an end to the “cannabis rainbow.”
“The market still lacks perspective when it comes to the size, shape and sustainability of Canada’s proverbial pot of gold,” Rolfe wrote.
Rolfe said several factors such as uncertain pricing, the need to crowd out a hyper-competitive black market and “inordinately high expectations” for profit led him to put sell recommendations on shares of Aphria, Aurora, Canopy and
Cronos Group Inc.
The cannabis sector has boomed in the past year, attracting a growing stream of investor interest. On Oct. 17, 2017, the Canadian Horizons Marijuana Life Sciences Index was trading for $9.86. On Tuesday, it reached a high of $27, a 173.8-per-cent increase in one year.
Those who invested in Canopy during the same period, for example, would have seen a 421.81-per-cent increase in share prices as they reached a high of $76.91 on Tuesday before sliding back down.
Jesse Pytlak with Cormark Securities said investors who are disappointed with the poor results on Day 1 of legalization will only get a real idea of how these stocks will perform after looking at earnings reports over the next few quarters. Some of them, Pytlak said, have likely already reached their highs for the year.
“There’s been a lot of hype around the sector for a long time and we’ve kind of been in a euphoric phase for the better part of two months,” said Pytlak, who has Canopy and Cronos rated market-perform. “It would be healthy to have a consolidation in share price for some of these players.”
Pytlak suggests investors dial down their exposure to the Canadian cannabis market, noting they’ll find better entry points than Day 1 of legalization over the coming months.
The attention could now likely turn to the U.S. cannabis market given the further opportunity for growth, Pytlak said. According to a BDS analytics and Arcview Market Research study, the legalized cannabis industry generated $8.5 billion globally in 2017. About 90 per cent of that came from the U.S.
Last week, MedMen Enterprises announced the $682-million acquisition of PharmaCan LLC, a medical marijuana vendor. The combined company, according to a MedMen press release, would become the largest cannabis company by market reach to operate in the U.S.
In Canada, meanwhile, Rolfe said it’s time for cannabis companies like Aurora and Canopy to show that they can grow into their valuation.
“What we’re seeing now is that the clock has started ticking — officially,” Rolfe said. “These companies now have to perform — and that’s uncertain.”