Investors waiting for cannabis industry to weed out losers

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This article was published 27/03/2019 (2692 days ago), so information in it may no longer be current.

It’s been five months since the legalization of recreational cannabis in Canada, and while there have not been any disasters, from the perspective of a mainstream investor, there are still plenty of unknowns.

The CFA (Chartered Financial Analysts) Society Winnipeg convened a few experts to discuss some of the challenges and opportunities at an event in Winnipeg on Wednesday.

Since legalization, each province has set up its own regulatory regime on top of the federal regulations. There have been supply shortages since Day 1, keeping prices high. Some producers were upfront in cautioning consumers that would be the case, but the shortages have also taken place in an environment where some regulators insisted it would not be the case.

Speakers, including Hardev Bains, the president and founder of Winnipeg’s Lionridge Capital Management, and Phil Cyrenne, an economics professor at the University of Winnipeg, said that regardless of the challenges that any new industry will face, there is plenty of demand for a product that has been around for a long time, albeit on the black market.

Not surprisingly, since all the companies are so new, the Marijuana Index, which tracks the leading stocks operating in the legal cannabis industry in the United States and Canada, has shown plenty of volatility over the past year.

But for investors who can’t help themselves when they hear of an investment opportunity involving something they have first-hand knowledge about, the possibilities are exciting.

Cyrenne said cannabis regulations, like alcohol regulations over the years, will loosen.

Bains is a value investor, which among other things means taking a long-term view on whatever investments he makes. Two of Lionridge’s top holdings are Berkshire Hathaway, Warren Buffett’s company, and Fairfax Financial Holdings, run by Prem Watsa; the two men are considered the American and Canadian patron saints of value investing.

While Bains told the crowd of CFAs that “there’s no doubt in my mind this is going to be a huge industry and there will be some very profitable companies,” he also said it’s too soon for value investors to determine which ones they will be.

In addition to what is a fundamental exclusion of investment from value-fund managers — Bains said he does not know of any of those types of funds that have invested in cannabis — by virtue of its sheer newness, the cannabis industry has also not been able to attract much of the plentiful venture capital that is out there.

Bains said most of the early-stage, so-called venture investments in the cannabis sector have come from retail investors rather than from professional venture capital investors, who heavily support the tech sector, for instance.

“The emotional factor definitely plays into it,” Bains said. “Cannabis is a ‘story’ stock. People like a story, something they can see first-hand. Lots of retail investors have jumped in without really knowing the fundamentals. They are attracted by the story.”

The industry has yet to attract much institutional funds, typically coming from more conservative, long-term investors who need to see some proof of performance.

As the track record starts to materialize quarter by quarter, Bains said, it will start to better illustrate the kind of metrics, like profitability, that the institutional investors need to see.

“That will give more of those institutional investors the comfort to make a decision,” Bains said.

That’s not to say all those retail investors are going to lose their shirts, but it’s an investment strategy that most advisers would advise against.

But regardless of the motivation of the investor or the perceived security of the investment, there are cannabis companies out there that are behaving with the same degree of responsibility with their shareholders’ funds as would be the case with any company considered a safe investment.

John Arbuthnot, the co-founder and CEO of Winnipeg’s Delta 9 Cannabis, definitely wants to attract long-term money, whether it comes from retail investors or institutional investors.

“We want long-term capital investment,” he said. “I think we are starting to see a shift (with more institutional investors coming around)… and that will provide some stability to the market. Over the next few years, there will be more of a focus on operating results. Less focus on telling the story and more on showing what you have done.”

martin.cash@freepress.mb.ca