Long-term quality still name of the game in pot space, says investment advisor
Two of the major players in the marijuana space made significant moves yesterday but amped investors have been warned to stick to their long game.
Aurora agreed to buy MedReleaf for $3.2 billion – the biggest acquisition to date in the Canadian cannabis industry – in an acquisition that means it will be capable of producing more than 570,000 kilograms of marijuana a year.
Meanwhile, Canopy Growth announced a non-binding agreement to buy the remaining 33% stake of BC Tweed Joint Venture in return for up to $374 million of its shares. Canopy also revealed it had applied to list its common shares on the New York Stock Exchange.
White said that while Aurora and Canopy’s aggressive moves clear the fog slightly with regards to investors’ strategy, the best approach remains picking quality and following the story.
He said: “For any of those investors who were able to pick the companies that were going to be sold, good for them and hopefully they got a price they like.
“But the challenge in this was always trying to pick the winners. At the same time, there is a limit to the consolidation because there is such a supply of these companies out there that can be bought; you don’t want to get stuck with a company that isn’t attractive for a buyout.”
He added that he still feels prices of weed stocks are “madness” and there will be blood out there because, simply, not everyone is going to get bought out. However, he said that Aurora, which also closed its acquisition of CanniMed earlier this month, and Canopy are good bets for the long haul because of their medicinal operations and with the legalization of recreational pot on the horizon later this year.
“These companies are positioned well – they are the ones looking to buy,” said Winnipeg-based White. “I don’t think you buy these with the idea of a short-term investment in mind. If you are looking for a quick buck, then you have to pick one of the companies that is likely to be bought out but that’s incredibly hard to pick.
“Frankly, with a lot of capital behind them, [Aurora and Canopy] are going to have a lot of options to buy out strategic assets.”
Charles Taerk, president and CEO of Faircourt Asset Management, which is the sub-advisor for the Ninepoint-UIT Alternative Health Fund, the first actively managed cannabis-focused mutual fund in Canada to have a full one-year track record, believes old shareholders of LEAF wanted liquidity and knew that although the company was operating well, it was not getting the premium value that other top-tier cannabis names are getting.
LEAF holders will be happy with the premium they’re getting, he said, adding that the deal positions Aurora as the pre-eminent marijuana company in Canada with significant operations in many continents and impressive innovation and capacity potential.
Taerk highlighted bull and bear cases on the deal. On the former, he said: “ACB is the largest Western Canadian LP, have made some great acquisitions, including LIQ on the distribution side, Larsenns for building greenhouses and CanniMed to add oil extraction and medical patient count, building on that name’s solid history in the medical cannabis business.
“The bear case is that we do see some execution risk in ACB as Aurora Sky (large Edmonton facility) isn’t quite ready at full capacity and may not have as much production ready for rec when Ontario and the western provinces provide supply agreements.”