The recent roll Canadian marijuana stocks have enjoyed seems to have gone up in smoke
SmallCapPower | November 24, 2016: Marijuana investors in Canada have been on a wild trip over the past couple of weeks. The biggest player in the space, Canopy Growth Corporation (TSE:CGC), has seen its stock price plunge 42% from its all-time high of $17.86 just five days ago, yet its shares have still appreciated 260% year to date. We spoke recently with StoneCastle Investment Management Portfolio Manager Bruce Campbell, who has studied this space extensively, to get his take on the recent volatility involving Canadian marijuana stocks.
Mr. Campbell, in an email to SmallCapPower, wrote that he believes from a technical perspective it looks like last Wednesday (November 16) may have been a capitulation top for the current uptrend, due to the high volume and large price swings in very short periods. Since at time there’s been a pullback in the sector and now the momentum has swung the other way. He thinks the sector may consolidate until the spring when the legislation to legalize recreational use is expected to be tabled in Canada’s parliament.
“From a valuation standpoint, based on current sales and cash flow, all the companies got way ahead of themselves. The share prices ran up and investors raced into the sector. This created a fantastic opportunity for the incumbent producers who are publicly listed. Several financings were easily done, which will allow the producers to build out their operations in preparations for the recreational approval. This gives them a huge advantage to any new or upstart companies who will need to finance their operations. Building the facilities can be very expensive to adhere to the government regulations,” he added.
Despite the recent stomach-churning ups and downs, Bruce Campbell contends that legal marijuana will be a “huge” growth industry for the next 10 years, both on the medical and recreational sides of the market. Longer term, the estimates are this sector could be $9-$11 billion in Canada: $3 billion of that from medical and $6-$7 billion from recreational. That will, of course, take years to build and develop, he said. And, to put that into perspective, the illegal marijuana black market in Canada is estimated at $10 billion, bigger than either wine or spirits.
In fact, Mr. Campbell is so positive on the Canadian marijuana space that his firm is in the process of launching a Marijuana sector fund.