What Comes Next for Cannabis Stocks?

Canadian marijuana stocks are under pressure again Tuesday as investors continue to take profits. A feeling of profit taking evolved to panic selling early Tuesday morning. At one point the Canadian Marijuana Index was down over 12% but had rebounded to be down just 3.8% at 1:30 PM EST. Still, the index has been smoked in recent days; and is down more than 20% over the past week and a half. As we explained in this weekend’s letter, the after legalization buzz is wearing off. We wrote that,

“The proverbial buy on mystery sell on history took over after October 17th, and that’s to be expected.”

As we move from a correction to a bear market, investors are re-evaluating their holdings. Keep in mind, this is the marijuana sector, one of the most volatile public markets on earth. For a better understanding of how the marijuana sector may evolve in the coming months and years, check out the recent interview from FP.

Focus to Shift to Medical Marijuana Industry

Greg Taylor, a portfolio manager for Purpose Investments, is interviewed by Larysa Harapyn of the Financial Post in mid-October.

Taylor looks at new markets set to open up and why Canadian marijuana stocks are due for a pullback.

“This is going to be a massive global opportunity here for the cannabis space. And I think we’re moving beyond just the Canadian borders.”

Most importantly, Taylor identifies medical marijuana as the next focus for capital in the space. We listed medical marijuana and the potential involvement of ‘Big Pharma’ as the first of four key fundamentals investors need to focus on this weekend.

“Medical for sure is where everything is going to go first. Medical markets are opening up in Europe and also in different states in the U.S. So; you want to look at companies going into the medical industry. Because I think that’s going to open up way sooner than the rec market.”

Furthermore,

“The US rec market is the holy grail, and that’s where I think a lot of people want to make a lot of money, but that is probably 3 to 5 years away.”

M&A Activity to Increase In Canadian Marijuana Market

Taylor and the host discuss M&A activity and why there are “too many players in the Canadian market.” Consolidation to create scale and lower prices will be key to the next leg of the cannabis market.

Taylor talks about changing sentiment towards the space from some of Canada’s largest banks. Also, as US banks continue to get more involved, it will create an impetus for Canadian banks to get involved.

Ultimately, Taylor concludes,

“Everyone talks about how much they can grow, but really can they sell? Can they keep the products on the shelves, can they keep them at a higher margin and can they build brands? And, I think really… it’s going to take another 3 to 6 months until we get the actual numbers out there to see who are the better operators which deserve these multiple that they’ve gotten.”