Could the current reefer (stocks) madness be signs of 1999 all over again?
Author: John Christofilos
October 15, 2018
Clearly, retail investors have become enthralled by the prospects of a fully-realized global cannabis industry emerging in the months ahead.
The Marijuana Index, which tracks shares of several cannabis companies, shows price appreciation has surged to a little more than $320, up from $121 a year earlier (as of Oct. 9), just days before recreational pot becomes legal across Canada.
While many of these stocks could end up being legitimate investments longer term, this hyped-up period of marijuana-mania — characterized by wild price swings, market halts and outsized valuations — has a striking resemblance to the unsustainable dot.com frenzy of two decades ago and should be cause for caution.
Here are some things investors might want to consider in separating the wheat from the chaff, or recognizing a speculative play versus a real investment based on fundamentals.
Follow the smart money
At least to date, we aren’t seeing much in the way of block trading when it comes to marijuana stocks, which would typically indicate that institutional investors are driving the market and view the space with some long-term promise. This fact, combined with record transactions at many discount brokerages, suggests to us that retail investors account for the bulk of trades. In other words, cannabis is not where the smart money is positioned.
Don’t believe all the hype
We’re also seeing a lot of trading based on hypotheticals as opposed to fundamentals: Europe is likely to legalize pot soon, the US will extend its legalization across the nation. And so on. At the moment, recreational use is now legal in nine US states and the District of Columbia. Meanwhile, a host of countries including Mexico and the U.K. are looking at legalizing medical marijuana. Still, much of the investing activity we’re now seeing in the market is tied to bets the U.S. will legalize federally—a move that still faces significant hurdles, and could take months—if not years—to materialize.
Keep an eye on valuations
One needs to exercise caution when a single data point causes wild gyrations. We saw this most recently when Tilray Inc. was up more than 1000% from its $17 IPO price, climbing to $300 based on bullish remarks by the Canadian pot grower’s CEO, according to Bloomberg data. That same week, Aurora Cannabis Inc. rallied after a news organization reported the company was in talks with Coca-Cola Co. to develop weed-infused beverages.
When a company trades at an exaggerated earnings multiple in relation to normal averages, it’s typically not sustainable. You don’t see that in orderly markets. It’s something you’re more likely to see in very speculative markets. It’s also the same modus operandi we saw in 1999-2000.
So, the upshot is that we think investors might be getting ahead of themselves. For the moment, it’s high time investors made their decisions based on sound fundamentals and not be wooed by the dizzying here-and-now of what is still a budding industry.
John Christofilos is Senior Vice President & Head Trader at AGF Investments Inc.
Commentaries contained herein are provided as a general source of information based on information available as of Oct 12, 2018 and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and the manager accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Investors are expected to obtain professional investment advice.
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Publication date: October 12, 2018
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