Article by Victor Ferreira, Financial Post
The legalization of cannabis in Canada was supposed to be a catalyst — the most powerful one yet, investors and analysts alike thought — that would launch companies in the young but potent industry to new heights. Instead, nearly one year later, it has been a nightmare.
Since recreational cannabis became legal on Oct. 17, 2018, the shares of what were then the 10 largest Canadian cannabis producers by market capitalization have been bludgeoned, yielding an average negative return of more than 57 per cent for investors.
Tilray Inc. alone has lost more than $14 billion in market cap, and Aurora Cannabis Inc. has shed $6.8 billion. Six of the Top 10 have lost at least half their value, with scandal-plagued CannTrust Holdings Inc. suffering such resounding losses that it no longer appears in the list. Of the 10, only Cronos Group Inc.’s market cap has grown over the past 12 months, though its share price has declined, like those of all the others on the list.
Prior to legalization, cannabis stocks soared on the promise of massive growth and the tremendous momentum that retail investors brought as they poured into the sector. Now that excitement has been drained, said Richardson GMP portfolio manager Chris Kerlow, and it is unlikely to return.
“A psychological shift has take place from everyone wanting to own (cannabis) to everyone involved now feeling burned,” he said. “I think many investors are now over (cannabis).”
Legalization played out like a classic “buy the rumour, sell the news” situation, Kerlow said. In retrospect, there were warning signs that legalization could be a disappointment.
At the time of legalization, the Canadian cannabis industry, even with minimal international exposure, had already exceeded the combined market cap of the publicly traded grocery chains, Kerlow said.
“What that’s telling us is in the future, people are going to be buying more cannabis than groceries and that’s obviously not going to happen,” he said.
Most of the top cannabis firms were trading near all-time highs on Oct. 17, 2018. Aurora Cannabis Inc., Tilray and Aphria Inc. would hit their highest post-legalization levels one or two days later.
The sector’s leaders immediately stumbled out of the gate and didn’t appear ready to handle consumer demand. A lack of inventory quickly led to massive delays for even the simplest orders to be filled. Aggressive expansion plans led to more investor doubts, this time about balance sheets and future profitability. And while most analysts held a positive outlook on legalization, skeptics at Veritas Investment Research Corp. warned about the end of the “cannabis rainbow.”
Looking back, Ninepoint Partners LP portfolio manager Charles Taerk said investors expected more dispensaries to be in place to meet the demand, an expectation that has still not materialized.
“A lack of dispensaries means a lack of education means a lack of sales growth that was initially anticipated,” said Taerk, who noted there are still only 25 legal cannabis retailers open in Ontario, although that number is expected to rise to 75 by the end of the year.