Pot Stocks Pummelled - Investors Dazed And Confused
The rug has officially been pulled out from underneath one of the largest bubbles in global equities: Canadian marijuana stocks.
RETAIL INVESTORS GONE WILD
Euphoric retail punters stratospherically bid up the sector over the last year, liberally opening their wallets to questionable management teams at even more questionable valuations. Investors had hoped that 2018 would be a ‘victory lap’ with the legalization of the Canadian recreational market set for the summer — it has been anything but.
The Global Cannabis Index is off -44% from the peak in January (see chart below). The market fully capitulated today with the three largest producers down significantly: Canopy Growth ($4 billion market cap) – 12.0%; Aurora Cannabis ($3 billion market cap) – 8.5%; and Aphria ($3 billion market cap) – 9.9%.
GLOBAL CANNABIS STOCK INDEX
Source: New Cannabis Ventures
FUNDAMENTALS FOR MARIJUANA STOCKS ARE AS SKETCHY AS THE MANAGEMENT TEAMS
In early February, Grizzle highlighted the risks in our deep dive report – Up in Smoke: The Overvalued Haze of Marijuana Stocks. We confronted the three inconvenient truths about the sector:
1. Legalization of marijuana always equals price deflation – In every legal market, retail and wholesale prices peak near the date of legalization due to lack of supply and then quickly begin to fall, driven down by new entrants.
SPOT LEGAL PRICES
Source: New Leaf Data Services
2. The black market is the biggest competitor for licensed producers – The marijuana market is mature in Canada with the black-market supply already exceeding demand (Canada exported 20% of marijuana production in 2017). Legal supply will have to compete on a price basis for market share — the black market won’t magically disappear.
3. Extreme valuations are reminiscent of the 2010 rare earth bubble. The bulls want to believe marijuana is a manufactured and branded product. It’s not. Marijuana is a commodity and always will be (see Colorado, Washington, and California)....
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HT: ZeroHedgeAlthough the Grizzle story doesn't mention it (nor ZH who should have caught it), Barron's cover story last week may have had something to do with the decline in the stocks:
Marijuana Stocks Could Be a Buzzkill
With its legalization of recreational marijuana later this year, Canada is pioneering a new industry. Investors may want to wait for the smoke to clear.
A cold rain beat down recently on the boarded-up cinder-block homes and empty factories of Smiths Falls, Ontario, melting the last snows in this industrial town about an hour south of Ottawa. One parking lot was full, however. Inside a shuttered chocolate factory, it is artificial summer for the marijuana crop of the largest cannabis company in the world, Canopy Growth.
In brightly lit, high-tech “grow rooms,” Canopy is preparing for the expected legalization of recreational cannabis this year in Canada—the first industrialized nation to do so at the federal level. Workers in lab coats harvest, trim, and package Canopy’s Tweed-brand products, then store them in a giant vault whose heavy door would do a bank proud.
It is a scene being repeated by companies across Canada, which wants to become the Silicon Valley of recreational pot.
Canada’s experiment is being closely watched by other countries, including the U.S., where federal law still classifies marijuana as an illegal narcotic, but where more than half of the states allow prescription sales and nine have legalized recreational use. The visitor log at Canopy’s Smiths Falls facility shows delegations from dozens of countries.
As they often do, investors have celebrated this emerging business early by embracing Canadian companies that claim a cannabis connection. Traveling in Canada, cabbies, bankers, and even border guards will tell you their favorites in a bubble that has floated Canadian cannabis stocks to a collective stock-market value above $30 billion. That’s already about half the market capitalization of Canada’s gold mining industry....MUCH MORE
