How investors can avoid falling victim to new industry and political disruption
Weed and trade, two topics synonymous with volatility in recent times, are linked by strategy according to one advisor: the need to buy quality.
In the marijuana space, the 13 LPs that signed deals with Alberta province appeared to have won a mini battle for legitimacy as the October 17 recreational legalization date looms.
However, many have reservations, believing the easy money has been made and valuations are out of control.
As Duncan Hood’s entertaining Globe and Mail prediction piece points out, “once the reality of the new market sets in producers’ sky-high valuations will come crashing down to Earth, taking investors with them”.
Grant White, lead partner and portfolio manager at White Hewson Wealth Advisory Group, said the pricing is “outrageous” and believes that any boost brought about by legalization or provincial supply deals have been – pun intended – “baked in”.
He said: “If I’m buying any of them, it’s Canopy right now – there’s a couple of others but the pricing is just off the charts still.
“It’s more of a situation where it is adding legitimacy and maybe a little legitimacy to the pricing. But more so, I think it’s going to be the case that the companies that are left out in the dark … I mean there is just going to be a bloodbath with some of them.”
He added that rather than any further increase in valuations, a 20-40% drop for some firms is more likely.
White said that an upbeat client told him recently that this might be the last new industry we ever see. “That may be true,” he said, “but at the same time it makes it really difficult to set a valuation on the companies. I’d stick to my guns on this one – you have to stick to the highest quality you can find if you want to be a part of that space.
“I wouldn’t bet the farm on it. It’s still a very speculative space and we still don’t know how it’s all going to shake out yet. Yes, there’s going to be winners but there’s going to be a lot more losers. The easy money has probably been made so you have to be prepared for some volatility.”
Meanwhile, a lean towards quality has to be the way forward with regards to tariffs, said the Winnipeg-based advisor.
The US’ tariffs on China have now kicked in and White believes this is more than just the usual noise, with the markets likely to be subjected to increased volatility.
He said: “You’ve just got be really careful and buy on quality right now because I wouldn’t be taking too many chances on speculative companies, whether they are affected by trade or not. As we know, when things get choppy, everything tends to get sold off, not just the directly affected companies.
“I would be leaning towards quality and making sure you are not overpaying for it. You have to be careful on price, actually. A lot of people are paying too high a price for companies out there and I think you have to be really careful about that right now.”