Some are calling marijuana stocks the next “great idea” or the “Green Rush” – but is it the right addition to your portfolio? Chris Blake, Senior Portfolio Manager, North American Equities, talks to Sara D’Elia about what investors need to know about marijuana growers’ stocks.
00:00:09.220 My guest says having a fear of missing out is not a reason to jump into this investment.
00:00:13.480 And that's especially true when it comes to any bright, new, hot stock
00:00:17.030 pick like marijuana stocks, where companies have earned nearly 30% year over year.
00:00:23.030 So the big question is, should you be jumping on the bandwagon?
00:00:26.620 Or should you wait on the sidelines to see how legalization shakes out?
00:00:31.180 Joining me is Chris Blake, senior portfolio manager
00:00:33.760 of North American Equities at TD Wealth.
00:00:36.280 So Chris, I want to talk to you a little bit about the current situation.
00:00:40.180 Where are we in our steps towards making marijuana legal in Canada?
00:00:44.830 Well, the government appointed a task force a year ago.
00:00:47.290 They've come back with their recommendations.
00:00:49.430 A total of 80 recommendations have been made.
00:00:51.850 Out of that will flow some legislation.
00:00:54.220 That's to be tabled at some point in the spring session.
00:00:57.790 So you touch on some of the potential changes.
00:01:00.670 What is currently being discussed or could be on the table?
00:01:04.790 Well, we're going to get to a situation where marijuana
00:01:07.630 is going to be available legally-- the recommendations say
00:01:10.630 to people over the age of 25.
00:01:13.420 They step away from marketing or co-marketing with alcohol and tobacco
00:01:18.790 and suggest that actually, these should be independent locations.
00:01:23.740 And they also allow for individual households to produce as many as four plants unto
00:01:30.056 Now the Canadian government is expected to come out
00:01:32.180 with their plan, which you had alluded to, in terms of the spring.
00:01:35.800 And the expectation is they're going to have a national policy.
00:01:38.980 If that happens, does it change your investment thesis at all?
00:01:42.520 Not really.
00:01:43.090 Because at this point, we really don't know what the size of the market is.
00:01:46.960 There are various suggestions.
00:01:48.280 It could be $4 and 1/2 billion.
00:01:50.130 It could be $20 billion.
00:01:51.550 I think the study that I saw that showed $20 billion
00:01:54.820 was more of a number that included things as marketing, and travel,
00:02:00.130 and other related items that really don't form
00:02:03.700 a part of any market for these individual companies, the growers.
00:02:09.699 So in terms of the overall market size, obviously
00:02:12.310 the range is quite large from today's standpoint.
00:02:14.890 In terms of if legalization happens, how much do you think it could grow?
00:02:19.189 The market itself will grow tremendously in the first stages.
00:02:21.730 Because we have no market currently, or what there is is hidden.
00:02:26.080 So initially, there will be tremendous growth.
00:02:28.330 However, I would expect that that mostly matures fairly quickly.
00:02:32.560 Because there's a certain segment of the population who will take up the product.
00:02:37.990 And they probably will not grow their usage too much after they've
00:02:44.500 developed whatever usage pattern they have.
00:02:48.340 Now even if these are legitimate companies, at these valuations,
00:02:52.240 do you think they look too expensive?
00:02:53.950 Yeah, I would suggest that they're probably too expensive right now.
00:02:57.580 I think the market size is around that $4 and 1/2 billion probably
00:03:02.110 make more sense initially.
00:03:04.150 And I would say that when you have several companies trading
00:03:07.750 at approximately a billion dollars in valuation,
00:03:10.920 that that more than discounts financially what the valuation should be.
00:03:16.030 So you said in your report that one of the reasons
00:03:18.340 you weren't going to buy marijuana stocks or you wouldn't be buying them
00:03:21.339 is because they lack strategic differentiation.
00:03:23.950 Can you explain what that means?
00:03:25.780 Well, the product is a plant.
00:03:27.970 And it grows from seeds.
00:03:29.140 And anyone can get the seeds.
00:03:30.580 And many of the seeds are going to be the same no matter who is growing the marijuana.
00:03:35.440 So I don't think it's going to be very easy, other than by some sort of genetic breeding
00:03:43.240 or so on, to try and goose the product or make the product more potent.
00:03:50.830 Within the recommendations that the task force made,
00:03:53.090 they suggested that there should be no marketing at all.
00:03:55.510 So how a company or a grower is going to suggest
00:04:00.699 that their product is better than the grower down
00:04:02.740 the street is a little difficult to believe that that can happen.
00:04:07.660 Now back in November, we had heard some media reports that the market was overvalued.
00:04:12.400 And we saw a number of investors actually short marijuana stocks.
00:04:16.360 So at today's prices, do you think this is going to continue?
00:04:21.130 I suspect that it will probably continue.
00:04:23.050 There will be a lot of manipulation of the stocks based on news flow.
00:04:26.170 When positive news hits the industry, like the enabling legislation hits parliament,
00:04:32.410 then it will likely cause the stocks to pop upwards.
00:04:36.580 Immediately, they will likely fill back in because other people will
00:04:39.880 take the opposite side of that trade.
00:04:41.554 And right now, it's just a gamble.
00:04:42.970 It's just a move from one set of suppositions to another.
00:04:48.310 And at this point, nobody can be proven right, because there is no market.
00:04:53.080 And we won't, in fact, see a market for a couple of years.
00:04:56.150 So let me ask you, we've heard a lot of talk about a bubble.
00:04:58.900 This has been called the quote unquote green rush.
00:05:01.750 Comparisons have been made to the tech boom.
00:05:05.080 We've seen growth rates of over 25% a year.
00:05:08.500 Forbes is saying that this industry is not only going to grow faster, but even larger
00:05:12.730 than dot-com era.
00:05:14.230 So clearly a very hot investment, but we don't know a lot about it.
00:05:18.100 So for an investor looking at this industry today, what would you tell them?
00:05:22.310 Well, I'd suggest to treat them as gambling chips.
00:05:24.460 I don't think they are investments.
00:05:26.230 You should not think of them as investments at this point.
00:05:30.250 If you feel compelled to own something like this
00:05:32.860 because you do have a fear of missing out, then keep this on a short, short leash.
00:05:38.620 And keep your finger poised over the sell button.
00:05:41.320 Thank you very much, Chris.