Some think pot stocks are finally priced right
This week’s bounce in pot stocks — the first in at least two months — could be the start of a renewed bullish run, some portfolio managers believe, as investors react favourably to more regulatory clarity on retail stores in Ontario and better-than-expected earnings from some of the major licensed producers.
“The sector got very washed out in the last quarter of 2019 and there was a lot of selling. The tax-loss selling became extreme, and a lot of people had given up on the sector,” said Greg Taylor, portfolio manager and chief investment officer at Purpose Investments, which runs the Purpose Marijuana Opportunities Fund.
“But the year started with a couple of good headlines especially regarding Ontario’s retail store rollout, and then you had some decent numbers coming out from some of the companies. So part of this uptick is also a short covering rally that’s going on here,” he added.
Over the last four trading days, the Canadian Marijuana Index, which tracks the top 16 Canadian cannabis stocks, rose by almost 20 per cent. Horizons Marijuana Life Sciences Index, another pot ETF under the ticker HMMJ, rose by 17 per cent starting Monday — HMMJ had lost more than 50 per cent of its value through the course of 2019. Taylor’s own fund, was up by about eight per cent this week.
A series of weak earnings from cannabis companies in mid-November sparked a sharp selloff, pushing most major pot stocks to some of their lowest levels ever. The bearish sentiment continued throughout December and early January, until this week, when Aphria Inc. and Organigram Holdings Inc. reported earnings that for the most part, exceeded expectations.
Organigram’s stock has surged 57 per cent since it reported earnings on Tuesday evening, its largest rally since the first half of 2019. Analysts, which have largely been bearish on the stock, responded favourably to Organigram’s recreational cannabis revenue numbers.
“I’m starting to see a general view out there that a lot of the cannabis stocks are well-priced now. We’ve seen a shake out in the markets generally, but (cannabis stock) prices have come down and investors are getting more confident that the pricing is right and they can identify companies that have a better balance sheet,” said Jason Wilson, a partner at ETFMG Alternate Harvest (MJ), a U.S.-based pot ETF.
Wilson firmly believes the worst is over for the pot sector, and investors have transitioned from pessimism to realism.
“Look, it’s always hard to predict sentiment especially because retail investors are emotional. Overall we are getting a sense that there is more patience from investors, versus pessimism,” Wilson said.