Why pot valuations are “absolutely crazy”

A senior advisor gives his verdict on the latest big-money deal in the pot industry

Why pot valuations are “absolutely crazy”

The latest big-money marijuana industry deal has left one advisor amazed at the “absolutely crazy” valuations.

It was announced yesterday that Aphria had agreed to buy Nuuvera, a global cannabis company based in Brampton, Ontario, for about C$826 million in cash and stock, in another sign the major players are consolidating ahead of Canada’s legalisation of recreational cannabis in July. The offer of about C$8.50 a share was 21% higher than Nuuvera’s closing price on Friday.

Sean Harrell, partner and senior advisor at Howe, Harrell & Associates, says the price-earnings ratios are way out of whack and is not advising clients to invest, unless they have some “play money”.

However, he believes the big companies have a good chance to become successful legitimate businesses, and that the stock surge that happened when California went legal shows that no one can really pre-empt how big this sector could become.

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He said: “I was reading a little bit on it and it said Apple’s P/E ratio was somewhere about 19-20, and a lot of these medicinal marijuana companies and a lot of these companies that are starting to look into, or get themselves ready for, the recreational industry, they are up over 1000.

“A lot of them don’t have profits yet; they have billions of dollars of market cap. I think things are going to get shaken out. The bigger companies will do OK but they will continue to buy and merger, and team up with these smaller companies who will end up being phased out.

“I wouldn’t be putting money into it right now if it’s my own money, so I would lean more to the side of overvalued or [there being] not much room for potential growth. I think the big returns have been seen already. The market tends to look forward and already price in future circumstance like legalisation in Canada.

“But you never know still. California surprised the heck out of me. So when California became legal in January, the stocks rocketed up like crazy over a two or three-day period. And yet we knew that was coming, so do they have it priced in for the future for July 1 coming up in Canada? I would say they should, but based on the way the markets reacted to California opening up, it wasn’t. So it’s a little bit of a different animal.”

Despite yesterday’s announcement, the price of Canopy and Aurora, for example, were down, suggesting a slight market correction after their fast rise. However, the explosion of the marijuana industry begs the question: how much bigger is this sector going to get? Harrell admits he faces a personal dilemma.

He said: “To be completely honest, I have, and am still holding Canopy and Aurora – I’ve been holding them for about 11 months. So I am stuck in that precarious position of, do I sell? Or is there room for it to run still?

“I got in it, I would say, late in the game, but I’ve been rewarded quite handsomely and I’m struggling with the question, should I sell or should I hold on because Canada Day presents a huge opportunity for these larger companies?”

Winnipeg-based Harrell says he is likely to stick to a game plan of holding until, ideally, stocks get up to their previous highs, after which he will systematically start divesting.

He said: “There’s a lot of hype and the earnings ratios are way out of whack. For something to be priced at 1,000 x P/E, to take 1,000 years to get your money back just doesn’t make sense. But yet that’s where these larger companies are and they are continuing to raise capital, and they are continuing to expand. So if they can capture the majority of the market, medicinally and recreationally, they should have a decent chance of building a decent business out of it.”

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