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CANNABIS EQUITY WATCH

by | Dec 19, 2016 | Capital Markets

December 19, 2016 – In the 90’s it was mining stocks. A decade later it was the ‘dot-coms’. These days speculation seems to have taken over the cannabis industry stock sector – especially north of the border. After the elections in the U.S. which saw more states (California, Massachusetts, Nevada and Maine) voting to legalize cannabis for recreational purpose, speculators poured into cannabis stocks.

In Canada, Canopy Growth Corp. traded from $8.29 to $13.45, adding $604 million in market capitalization – in just a few trading sessions. As far as cannabis companies go, Canopy has some traction. For the six months ended September 30, 2016, it posted $15.4 million in revenues, a 270% year-over-year increase from the $4.1 million reported for the same period last year. So, let’s assume the business is going to come in at $30 to $40 million in revenues for its current (2017) fiscal year. That’s still a dizzying 30x sales – best case scenario, at the price it closed at on Friday, $10.04. If we assume it comes in at $3-4 million in net income, its trading at 292x forward earnings.

This is speculation at its worst. Makes no sense.

To be sure, if they can manage it, using their stock at the current premium to go out and make some acquisitions would be a great way for Canopy to try and catch up to their valuation. But for investors, it might make sense to take a defensive position.

The point in this commentary is not to try and chill an exciting cannabis company. We are bullish on the cannabis industry and believe in the growth ahead. We just don’t drink kool-ade Remember, someone bought that Canopy stock on November 15 at $13.45 and a month later their investment is worth 25% less, and is still trading the equivalent of $300 gram of cannabis when the average street price is $10.