The Marijuana 2.0 Stock Bubble is here

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You would be hard pressed to find an industry that has produced more robust returns than cannabis in recent months. The ETFMG Alternative Crop ETFs, a mutual fund that contains an assortment of direct and ancillary marijuana stocks, is up 212% since late October (through February 10).

Some individual jar stocks have did several times better. Producers of sundials (NASDAQ: SNDL), Tilray (NASDAQ: TLRY), Aphria (NASDAQ: APHA), Aurora Cannabis (NASDAQ: ACB), and HEXO are up by 2,280%, 1,190%, 535%, 388% and 341% respectively since the end of October.

This begs the question: what are investors smoking?

Image source: Getty Images.

Here’s why cannabis stocks are becoming “bong-kers”

In recent weeks, multiple factors have created a buzz about pot stocks.

For starters, Democrats taking control of Congress and the Oval Office could drive real federal cannabis reforms. During the previous administration, Republican Mitch McConnell repeatedly blocked cannabis legislation from reaching the Senate as Senate Majority Leader. Now, as the Senate Minority Leader, McConnell no longer holds the same power. New Senate Majority Leader Chuck Schumer has made it clear he intends to co-draft legislation to legalize marijuana in the United States

As a reminder, Gallup’s national cannabis opinion poll showed that a all-time record 68% of respondents in 2020 promoted the idea of ​​legalization. Specifically, 83% of self-identified Democrats want to wave the green flag on marijuana, compared to just 48% of self-identified Republicans.

Secondly, the long-awaited consolidation is underway. In mid-December, Aphria and Tilray announced their intention to merge and create the largest cannabis company in terms of annual sales. The combination of these two activities will result in tangible cost synergies, improved global reach and a broad portfolio of derivatives (e.g. edibles, beverages, vapes, concentrates, oils and topicals) which are expected to increase operating margins. global.

Third, the North American pot industry is showing signs of maturity. Following the publication of the results for the third fiscal quarter, Canopy growth (NASDAQ: CGC) announced he was going generate positive operating cash flow by fiscal 2023, as well as positive adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) by the second half of fiscal 2022. Meanwhile, many US multi-state operators are expected to break through to recurring profitability in 2021.

A person using a pin to pop a bubble containing a green dollar sign.

Image source: Getty Images.

Canadian pot stocks have entered “Bubble 2.0”

It all probably sounds good, but we’ve been here before. Canadian potted stocks have promised investors the moon in the past, only to disappoint them. Based on the stock price appreciation we’ve witnessed in recent weeks, it looks like Canadian marijuana stocks are on the verge of easing for shareholders again.

As many polls suggest that the American public is in favor of legalization, but pushing it through just isn’t that easy. Unless Democrats drop filibustering in the Senate, which is unlikely, 60 votes would be needed to pass cannabis legislation. That means getting 10 Republican senators across the aisle, which will no doubt be a difficult task.

Even though House Speaker Nancy Pelosi and Senate Majority Leader Schumer successfully passed a law to legalize marijuana, it’s unclear whether President Joe Biden would sign it. Biden campaigned on the idea of decriminalize and reprogram cannabis – do not legalize it. Let’s not forget that Biden was behind some bills drafted three decades ago that targeted drug addicts and traffickers with stiff penalties.

It is also not clear that the current wave of consolidation in the marijuana space is occurring out of force. Although Wall Street and investors hailed the Aphria-Tilray merger, finding a partner seemed more of a necessity for Tilray than for Aphria. Tilray had been burn your money at an extraordinary rate and relying on equity and debt offers to raise capital. This is not what I would consider a fusion of strength.

A transparent jar full of cannabis buds sitting on a stack of fan-shaped twenty dollar bills.

Image source: Getty Images.

There are also serious disconnections in the underlying fundamentals. The aforementioned Canopy Growth report that got Wall Street excited presented another quarter with a huge cash outflow (C $ 135.4 million) and a large net loss of C $ 829.3 million. Canopy Growth had nearly C $ 5 billion in cash and cash equivalents following a large equity investment of Constellation brands in November 2018. She now has less than C $ 1.6 billion in cash and short-term investments. The company bleeding money for years and is still far from recurring profitability.

Canadian potted stocks also have a habit of destroying shareholder value through multiple rounds of stock offerings and debt-for-equity swaps. Although Tilray and Canopy Growth have issued a large number of shares over the years, neither takes into account what Aurora Cannabis and Sundial Growers have done to their shareholders. The number of Aurora shares outstanding has catapulted by more than 12,200% since June 2014, while Sundial’s outstanding shares count increased by more than a billion shares since the end of September.

The Canadian cannabis industry may be successful in the long run, but investors are not being rationalized if they expect a rocket launch after years of underperformance.

It’s time to face the facts: Cannabis stock The 2.0 bubble is here, at least for Canada.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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