‘No Bottom’ For Pot Stocks as Investors Fret Over Possible Downturn

Written by: Jeff Lagerquist – Yahoo Finance

Concern that cannabis stocks will not be able to weather the storm if markets head for a protracted slump is setting in as shares of major players remain under pressure, according to one asset manager.

Barry Schwartz, chief investment officer at Toronto-based Baskin Wealth Management, expects the backdrop of recent broader market declines has investors reevaluating the risk of owning a piece of the much-hyped cannabis sector. Baskin has over $1.1 billion in assets under management.

“I think the long-term trend is lower. If we are truly heading into a rougher market, these companies don’t have earnings. They don’t have dividends. They don’t have share buy-backs. They don’t have institutional support. There is no free-cash-flow. So there is no way to value them,” he told Yahoo Finance Canada on Tuesday. “When the markets fall, the only thing you can anchor on is valuation.”

The S&P/TSX Composite and the S&P 500 have fallen about five per cent since Canada legalized recreational marijuana on Oct. 17. Major North American equity markets showed cautious signs of optimism on Tuesday, after U.S. President Donald Trump spoke about a potential for “great deal” with China that would avert a major trade war.

Meanwhile, the Horizons Marijuana Life Sciences Index ETF (HMMJ.TO), the largest cannabis ETF, has declined 33 per cent since its recent peak in the weeks ahead of legalization. The plunge from recent highs has been even steeper for Canopy Growth Corp. (WEED.TO), down nearly 40 per cent, and Aurora Cannabis Inc. (ACB.TO), down 47 per cent since Oct. 15, as of midday Tuesday.

“When they are going up you feel like you are invincible. When they are down, there really is no bottom for some of these names,” said Schwartz. “We saw the same thing in other booms. Whether it was cryptocurrency, or mining, or oil and gas, everybody was looking for an easy score.”

He notes the excitement over cannabis stocks is unsurprising, given the lack-lustre performance of Canada’s benchmark index. “If you look at the TSX cumulative over an almost two-year period, it’s down,” Schwartz said, adding that even major U.S. companies with solid earnings have not been rewarded by the market.

“Look at Amazon. Look at Google. They had unbelievable, un-godly profits, and the market just threw them in the garbage,” he said. “You’re going to tell me that Canopy should hold up better when it has no profits?”