Marijuana Stocks Are an Accident Waiting to Happen: Fund Manager

AlphaNorth Asset Management Chief Investment Officer says a meltdown for marijuana stocks is inevitable

SmallCapPower | May 26, 2017: In a recent note to investors, AlphaNorth Asset Management Chief Investment Officer Steven Palmer said that although the marijuana sector’s strong performance over the past year has been one of the factors contributing to improved investor sentiment in the Canadian junior space, a meltdown for marijuana stocks is, in his opinion, “inevitable.”

Related: For Our Complete Coverage Of Canadian Marijuana Stocks Click Here

Mr. Palmer asserts that despite the fact that the share prices of the marijuana stocks of the incumbent players have been drifting since the federal legalization announcement in April, there has been a plethora of new companies trying to get in on the mania. In his view, this is “an accident waiting to happen and is a gross misallocation of capital, which will be ultimately wasted.”

Mr. Palmer believes sophisticated investors know this and are now avoiding marijuana stocks entirely or treading very carefully, as investor interests have been overshadowed by lucrative sell-side opportunities. In his view, analysts have no incentive to make negative comments as their investment banking and sales counterparts keep churning out several new deals a week. Meanwhile, the promoters of marijuana stocks are benefiting from owning seed marijuana stocks, which they continue to distribute at significant profits at the expense of retail investors.

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Despite some negative sentiment towards marijuana stocks, as expressed by people such as Mr. Palmer, and the recent volatility in the sector, the global movement towards legalization shows no signs of the stopping, especially now that the ‘genie is out of bong’ or bottle depending on your perspective or state of mind at the time.

Trading activity of many marijuana stocks is starting to resemble that of the Dot-Com bubble and bust, and if history is any indication companies such as Canopy Growth Corporation (TSX: WEED) could be a trimmed down version of what Amazon.com, Inc. (NASDAQ: AMZN) was 17 years ago. And as for promising smaller players such as Aphria Inc. (TSX: APH) and Aurora Cannabis Inc. (TSXV: ACB), they will probably consolidate and/or be acquired in what likely will become an industry that will be dominated by a few big participants.

Disclosure: Neither the author nor any of the principals at Small Cap Power, or their family members, own shares in any of the companies mentioned above.

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