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Investors dive into marijuana stocks, raising concerns about green bubble

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Before Brad Austin arrived at work one recent morning, his stock market investments were up by $4,000. The bump was something the sales manager at an Edmonton car dealership has become accustomed to, despite having no prior trading experience and no financial advisers to guide him.

Austin says he knows what he’s doing, but he also has luck on his side. He won $20,000 playing slot machines at a casino in August and decided to drop all of the spoils, plus another $5,000 of his own cash, into another big bet: cannabis stocks.

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He has not been disappointed.

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Austin made $70,000 — close to what he’d earn at the dealership in an entire year — only five months into what he expects will be a years-long investment play.

“I took that $20,000 plus $5,000 of my own, and it was just growing, so I took an additional $20,000 that I had in my savings,” Austin said, adding he believes his investments are parked in low-risk bets.

“It was too good to be true, I thought. It was growing so fast. And fast for me then was $2,000 or $3,000 (a day). One day I made $5,000. I thought, whoa, this is crazy.”

Soaring marijuana stocks have cultivated a new wave of first-time investors seeking to get rich from an emerging industry. An index of top-performing cannabis stocks in Canada shows share prices have tripled in the past six months. Some have shot up even higher.

While companies have been busy growing their operations, there is no market-driven justification for such a massive swing in stock prices, said Dan Nicholls, vice-president of the Los Angeles-based Marijuana Index. 


Speculation and investor frenzy are fuelling many of the gains. In the final three months of 2016, average trading volumes for companies tracked on the index were more than eight times higher than they were in the previous three months.

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The 11 companies have a combined market capitalization — a key indicator of value — of more than $4 billion. But only two — Aphria Inc. and Canopy Growth Corp. — posted profits in their most recent earnings reports.

Vancouver-based Aurora Cannabis Inc., which runs a sprawling greenhouse north of Calgary with a new facility under construction in Edmonton, warned in a November earnings report that it may never be profitable.

“There is no assurance that the company will be successful in achieving a return on shareholders’ investments, and the likelihood of success must be considered in light of the (company’s) early stage of operations,” the third-quarter report stated.Cannabis Index graphic

Aurora, like many other cannabis companies, is in spending mode as it expands operations and product lines in anticipation of what it expects will be a multi-billion-dollar industry.

But in these early days, the cannabis market is fraught with risk. None of the players know the exact size of the recreational market, with sales estimates ranging from nearly $5 billion to roughly $10 billion.

Company executives also don’t know how the market will operate — something to be determined by the federal government – or how many early players will survive to see the market mature.

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Analysts have drawn parallels between the cannabis market and the dot-com bubble of the 1990s and early 2000s, when early stage companies attracted a frenzy of investments but failed to live up to expectations. Companies folded and trillions of investment dollars evaporated.

Other observers say while marijuana company values may be high, the players have real products with real sales that are growing, unlike the many dot-com firms that fed that bubble.

Still, cannabis investors chasing the Big Green Rush are playing a dangerous game, Nicholls said.

“For a first-time investor, stocks are always risky,” he said. “You can lose everything you put in, potentially, especially in a market like this.”


At a downtown Calgary hotel, investors pack a small banquet hall for a marathon of pitches from cannabis company executives seeking funds to grow and capture a slice of the marijuana pie.

The room is filled with men and women in suits to discuss an industry that for decades had been viewed as the domain of doobie-smoking activists. The election of Justin Trudeau and his pledge to make Canada the first G7 country to legalize recreational marijuana has started attracting investors with deep pockets.

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According to industry observers, American investors have been flocking to Canadian cannabis stocks to avoid restrictions on investing in U.S. pot producers and to seek riches in a blossoming network of federally licensed, publicly traded growers in Canada. American interest has helped fuel massive trading volumes in Canadian stocks, according to Nicholls.

On this day, private equity investors, pension plan managers and individuals with high net-worths have flown in from across North America, most of them from Canadian cities. 

They’ve come to the financial centre of Canada’s oilpatch to discuss marijuana, something that would have seemed absurd even a year ago. It still feels extraordinary.

Every 15 minutes, over five hours, a new company executive stands behind the podium to boast about their firms’ track record and path to riches.

“Look at what we’ve done; know that we’re going to continue to do it, and buy some stock in Aurora,” Terry Booth, Aurora Cannabis’ chief executive and co-founder, says in what is easily the most unabashed plea for investor dollars.

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“Look at our market value in 12 months. Well, how did we get there? It’s not false. It’s because we executed at every level of this company.”

Cam Battley, senior vice-president with Aurora Cannabis, checks plants at the company’s massive greenhouse near Cremona.
Cam Battley, senior vice-president with Aurora Cannabis, checks plants at the company’s massive greenhouse near Cremona. Photo by Gavin Young /Postmedia Network

Aurora, Alberta’s only licensed producer of medical marijuana, runs a 55,000-square-foot greenhouse near the village of Cremona that is capable of serving up to 15,000 patients. By late December, nearly a year after the company made its first sale, it had more than 12,000 patients.

During that same 12-month period, Aurora’s stock price nearly quadrupled, from 60 cents to $2.30. The company, which is building an 800,000-square-foot production facility by the Edmonton International Airport, is valued at well over $680 million on the stock market. It’s the second-highest market capitalization among publicly traded cannabis companies in Canada, behind only Canopy’s $1.2 billion.

“Phone your broker on your way home,” Booth says. “Or if you’re a broker, phone your clients on your way home.”


Trading in cannabis stocks, which has pushed prices and values higher, has largely not been driven by the traditional levers of financial performance, such as earnings and cash flow, said Bruce Campbell, founder and portfolio manager at Kelowna-based StoneCastle Investment Management Inc.

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Instead, trading has been influenced by the anticipation of a recreational market, which remains a political promise, though momentum appears to be building in Ottawa.

Investors have relied on projections about the potential size of the market, the slice of the market that each company could capture and the sales they could secure three or four years from now, Campbell said.

“Typically, most investors aren’t super comfortable with that,” he said. “Most investors are looking 12 months, maybe 18 months out because that’s the most visibility they have. And even then we know the world changes. But this is a brand new industry.”

This industry-wide fervour has led to periods of euphoria in financial markets. The latest came in mid-November, when investor excitement over cannabis stocks sent prices and valuations soaring, which triggered temporary trading halts for six companies in an effort to cool the volatility.

The flurry came a week after eight U.S. states voted to reduce cannabis restrictions and in anticipation of the Canadian cannabis task force’s final report on legalization.

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An employee arranges containers of marijuana on shelves at a retail and medical cannabis dispensary in Boulder, Colo. In the recent U.S. election, eight states voted to relax cannabis restrictions.
An employee arranges containers of marijuana on shelves at a retail and medical cannabis dispensary in Boulder, Colo. In the recent U.S. election, eight states voted to relax cannabis restrictions.  Photo by Brennan Linsley /Associated Press

“There is so much interest and so much excitement about what the size of the business could be that people get these ideas,” Campbell said. “The animal spirit takes over, and investors want to own these things.”

Campbell said this type of investor behaviour is reminiscent of the tech bubble, where investors flocked to dot-com companies en masse, paying inflated prices based on rosy projections and wild speculation.

Tech company valuations reached heights that could not be justified by traditional principles of investment management, another factor that appears to be taking shape in cannabis stocks, Campbell said.

The dot-com bubble had also attracted shell companies, many of them previously involved in oil and gas or mining, and changed their business to tech as they “chased the latest rainbow,” he said.

Four of the 11 top-performing Canadian cannabis stocks — Aphria Inc., Emblem Corp., Emerald Health Therapeutics Inc. and PharmaCan Capital Corp. — were previously capital pool companies, which are publicly traded shells that seek businesses to acquire or merge with, according to financial records.

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OrganiGram Inc. and THC BioMed International, two other top-performing Canadian stocks, each underwent takeover deals with resource exploration companies.

“Is there a bubble in the entire sector? That will only be known with time,” Campbell said. “There’s speculation that’s the case. Certainly there’s individual stocks that are in a bubble territory…

“I don’t believe the overall sector is going to be wiped out or become worthless.”


Brett Wilson, a Calgary entrepreneur and a co-founder of the oil and gas investment firm FirstEnergy Capital Corp., is building a portfolio of cannabis investments. He says he hasn’t smoked marijuana since 1976 at the University of Saskatchewan, but he is still seeing green.

By taking a position in cannabis companies, Wilson wants to accelerate research into marijuana’s medicinal properties while promoting what he calls responsible consumption, but there is also money to be made.

“The size of the market has not even been tapped; we just don’t know how big it is,” he said.

“It’s too early to think about who the winners and losers are because there’s going to be so many winners, and that’s really what’s attracting capital to this industry right now at a frenetic pace.”

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Calgary entrepreneur Brett Wilson is building a portfolio of cannabis investments.
Calgary entrepreneur Brett Wilson is building a portfolio of cannabis investments. Photo by Stuart Gradon /Postmedia Archives

Wilson is among several market backers who recently invested $3 million in Vancouver-based Tokyo Smoke, which wants to become the Starbucks of cannabis.

While Wilson has thrown his name behind several emerging cannabis players, he said he is aware of overvalued companies seeking investor dollars.

“There are a few stories that are a bit bubbly,” he said. “But you know what? They are raising equity in these markets right now and that will underpin — not undermine — the value of the story as they start to raise money at, call it, inflated prices.”

Michael Berger, a former energy analyst at financial services firm Raymond James who started a company providing research and analysis on cannabis stocks, raised doubts about a Canadian bubble.

“The only way I would compare the tech bubble and the cannabis market in Canada is the number of millionaires it’s going to create,” said Berger, president and founder of Miami-based Technical420.

Still, Berger said the Canadian cannabis industry could be in for a correction that will deflate company values, perhaps triggered by potential setbacks in Ottawa’s rollout of legalization.

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“No industry just goes up. There’s going to be a correction by probably 15 per cent, 20 per cent on average,” he said, adding these dips are “buying holidays” allowing investors to take a stake in “very high-quality companies at attractive prices.”

While Berger remained bullish about the industry, he said there are plenty of ways investors can get burned, including poorly structured fundraising deals.

There are also risks of pump and dumps — illegal schemes that artificially inflate stock prices allowing fraudsters to buy low and sell high — emerging in Canada’s cannabis industry, as they have in the U.S., he said.

“If they’re in terrible investments, they can lose their money,” he said.

Calgary accountant and investor Austin Hanna considers the cannabis industry “a golden ticket.”
Calgary accountant and investor Austin Hanna considers the cannabis industry “a golden ticket.” Photo by Gavin Young /Postmedia Network

Despite all this risk, Alberta investors are still flocking to the Big Green Rush.

Austin Hanna, a 27-year-old accountant at a Calgary oil and gas company, said he lacks investment savvy, but the cannabis industry “right off the bat seemed like a golden ticket.”

Hanna invested tens of thousands of his own money into stocks, and watched them grow. His portfolio nearly doubled in value by November, when he withdrew his profit and put a downpayment on a house, not the typical path for a millennial.

Before reaching the age of 30, he’s already thinking about early retirement and hoping his cannabis holdings will get him there.

“Now that I’ve bought a house, I’m kind of relying on it not to go to zero,” Hanna said. “If I didn’t have the investment, I’d be OK. It’s an awesome little bonus. But I’m starting to rely on it for the future.”

rsouthwick@postmedia.com

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