Canadian Pot Stocks — The Short Basket that Keeps on Giving
Marijuana equities have been one of the greatest gifts for short sellers: skittish retail investors coupled with valuations only a Tesla fanboy could justify. They are now officially burdened with the dreaded ‘Canadian Bank’ curse after the announcement that Bank of Montreal is making a meaningful long-term commitment to the sector.
The big 5 Canadian banks are notorious for making splashy banking forays into new markets at bubble tops (e.g. rare earths). And marijuana is certainly one of the splashiest of them all. It was only 6 months ago that the risk-averse and flat-footed banks wouldn’t dare to touch the stuff on the investment banking side, let alone allowing licensed producers to open bank accounts.
The Globe and Mail reported on Monday that Bank of Montreal (BMO) will be pushing deeper into the marijuana sector by assigning a dedicated analyst and holding its first cannabis conference at the end of May.
Like clockwork the marijuana equities got dumped. The bellwether Canopy Growth (WEED-T – C$4B market cap) sold off 7% yesterday, and was off as much as 6% in the AM market today. While global equity markets celebrate Xi’s soothing words, marijuana investors are getting bludgeoned with panic selling.
The Bay Street ‘Gift’
There’s no question the ‘privileged’ BMO clients that got to participate in the $175 million Canopy Growth equity issuance at $34.60/share in late January are wishing they had that pitch over again, top ticking the market to near perfection, the stock is off over 30% since.
Canopy Growth (WEED – TSX)
Source: Yahoo Finance
BMO now has the formidable task of trying to get anyone to care about a sector that is functionally broken. They’ll certainly attempt to spin some yarn about the long-term global potential of exporting Canadian marijuana — a notion that Grizzle thoroughly debunked in our Marijuana Export Mirage report.
Unbeknownst to most of the investment bankers and management teams who have never actually smoked pot, marijuana is a weed and grows with minimal care anywhere. Most true connoisseurs would take high quality outdoor Jamaican pot over the mould-prone Canadian indoor on offer.
Canopy Growth – The Downside: $7/share
It doesn’t take a lot of heroic assumptions to get to a sub-$10 share price for Canopy Growth. Let’s review:
1. Assume Canada is flooded with oversupply, Grizzle’s supply/demand analysis suggests that certainly is the case.
Source: Public Filings, Grizzle Estimates
2. A $4.50/gram retail price (Colorado’s there already), 20% EBITDA margin and capacity in line with management guidance, and a 5.5 EV/EBITDA multiple (in line with other commodity producers)
3. Downside target price of C$7/share – 72%
A proverbial case of shooting fish in a barrel, the short selling shall continue.
Get ‘Up in Smoke’ – In this deep dive macro analysis of the Canadian marijuana sector, Grizzle lays bare all the inconvenient truths of this highly overvalued sector.
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