“We Don’t Need 100 Cannabis Companies,” Cannabis Industry Analyst Says

Cannabis industry analysts expecting consolidation and continued volatility.BNN Bloomberg is reporting that cannabis industry analysts are predicting “shareholder activism” and consolidation of companies. These come in the wake of several reports of “inadequate” corporate governance practices within the cannabis industry. The sheer number of companies within the cannabis industry seems to indicate consolidation is on the horizon.

“There’s [a large] amount of cannabis companies, when you line them up, from the TSX, the Venture, the CSE,” said Matt Bottomley, director of equity research at Canaccord Genuity Inc. “In Canada, we have three telecom companies, five or six banks, so we don’t need 100 cannabis companies.”

Much of the criticism will come from short-seller reports, Bottomley said. One of the highest profile examples happened in December when Quintessential Capital Management’s Gabriel Grego criticized Aprhia Inc. of overpaying on assets in Latin America. Aphria’s stock plummeted to $5.00 CDN on the TSE on the news, despite Aphria’s protests that it was essentially being attacked by a short seller. The stock recovered somewhat, closing at over $14 on February 5, 2019.

There have been other reports by stock analysts warning about Canadian companies being too aggressive in predicting cannabis profits. Some said that “100 per cent” of licensed producers in the cannabis industry need to improve how they disclose fair value.

Bottomley told BNN Bloomberg that it will be these types of reports that start driving stock prices within the cannabis industry. “There’s going to be winners and losers in this space and I think short-sellers’ reports could, down the road, put some spotlights on those,” he said.

(Incidentally, Quintessential Capital Management reportedly said that they are “moving on to other projects”. In the meantime, Aphria has rejected a hostile takeover bid from Green Growth and said its CEO Vic Neufeld is stepping down.)

Volatilty in Cannabis Industry Leads to Opportunities for Investors

Eric Foster specializes in the cannabis industry at Toronto-based Dentons law firm. He said that the volatility in the stock market compounded by interest from US investors makes for some good opportunities.

“There’s insane stock volatility,” Foster said. “When you have governance issues and companies whose financial results may not hit expectations or frankly [don’t make] that much money to justify their valuations, that’s going to draw attention from activists.”

This editorial content from the LPC News Editor is meant to provide analysis, insight, and perspective on current news articles. To read the source article this commentary is based upon, please click on the link below.

 

 

Leave a Reply

  1. Captain Dred

    We actually do need 100s of Cannabis producers. This is not the telecom or banking industry we are talking about. Cute analogy, but it’s completely flawed and a total straw man arguement. Dude clearly does not know the first thing about cannabis production.

    Everyone that does know about cannabis knows that Canada has traditionally, for 100 years now, had hundreds to thousands of small cannabis producers. And we got a worldwide reputation for some of the best cannabis in the world that way.

    Our Licensed Producer system does not have that reputation. They are definitely overvalueing themselves. They grow crappy cannabis and sell if for 5 times what it would be worth if it was the same quality as traditional Canadian craft grown cannabis.

    How about instead of comparing apples to grapes and saying they’re all oranges, we compare growing cannabis to say, FARMING, cuz it IS FARMING, or at least compare it to beer guys. We have 100’s of successful craft breweries in Canada. We have 100s of wineries in Canada.

    We have a great many farms. We don’t just have 5 farming companies or 5 beer companies or 5 winemakers in Canada.

    Learn the industry before giving stupid investor advice, please.

  2. LPC News Editor Listing Owner

    I would agree that the statement about “needing” 100s of cannabis companies is off-base. In fact, I would say that there isn’t a “need” either way — the market will support what the market will support. This analyst is obviously looking from a purely corporate position. He’s saying, in essence, that three or four “super companies” could supply Canada’s cannabis needs. He’s right to a point. But as you correctly note, this will have an impact on quality. Monopolies and oligopolies tend to be bad in general for consumers.

    LPC has always been in favour of craft cannabis growers — and your comparison with craft brewers is apt.

    That being said, consolidation seems inevitable for the bigger companies — at the very least because that’s the trend in business for hundreds of years. You can see this as recently as the dotcom bubble. There were hundreds or thousands of companies in 1999, but that was cut to a fraction by 2002 through consolidation or simply companies going belly up. Considation in more likely in this case since cannabis companies — unlike many tech companies at that time — tend to have actual assets including crops, equipment, space, etc. (not to mention an already-licensed facility).

    In my mind, consolidation is not about “need” — it’s simply an inevitable part of the business cycle.