Soft US debut for Canadian pot giant Aurora – but cannabis investors aren’t worried
Aurora Cannabis joined a select list of Canadian cannabis firms when it started trading on the New York Stock Exchange overnight.
But it wasn’t the windfall investors had hoped.
Scoring a listing on a US-based exchange is coveted for Canadian cultivators (known as licensed producers, or LPs), since cannabis remains a federally controlled substance under US law. Canada legalised cannabis on October 17.
The volatility mirrors Aurora’s peers in the North American cannabis sector.
Tilray and Canopy Growth, which already trade on US exchanges, fell around 2 per cent overnight.
Many of the 30-or-so ASX-listed cannabis stocks have also lost ground over the past six months.
Analysts and investors say they aren’t worried about the recent sell-off, however.
Most believe the volatility is to be expected in an emerging sector like cannabis – and could even present an opportunity to those who can stomach it.
Credit ratings agency downgrades cannabis
The cannabis stock sell-off could be due to a recent report released by credit-ratings agency DBRS, says David Kideckel, an analyst at the Toronto-based investment bank AltaCorp Capital.
The report, released Monday, gave the Canadian cannabis industry a B-rating, or non-investment grade rating.
“We view yesterday’s sell-off as a consequence of DBRS’s bearish report. While cautious in its stance, we are not surprised given the volatile nature of the cannabis sector,” Kideckel wrote in a note.
The DBRS report said that there’s much to be determined “regarding consumer reception, competitive behaviour, regulation, taxation, and international market potential” in the cannabis industry.
The report estimates that the adult-use cannabis industry will hit $US4 billion to $US6 billion in annual sales, which is still much less revenue than Canada’s alcohol and tobacco sectors.
“For now, cannabis is still a relatively small-scale subsector within the context of the consumer products industry and the economy in general.” analysts at DBRS said in the report.
The analysts pointed to the lack of historical data to use as a benchmark to gauge the sector’s performance and highlighted the lack of positive cash flow among the publicly-traded LPs.
But DBRS isn’t totally bearish on cannabis. As the industry settles – and more data becomes available – DBRS said the “risk profile” of the cannabis industry could “improve significantly” especially for LPs that develop strong branding around their products.
Kideckel, the AltaCorp analyst, said that for cannabis companies to achieve an investment grade credit rating, “predictable cash flow and consumer behaviour pattern data will be required in addition to strong branding and international growth opportunities by the LPs themselves.
Overall, AltaCorp remains bullish about the cannabis sector, with the caveat that it will experience volatility in the short and medium-term.
A lot of investors aren’t worried
Some analysts highlighted Aurora as one of the LPs that may win out in the long term.
Analysts at the investment bank GMP Securities said in a note that Aurora’s product successes in the first days of Canada’s legal market make the LP “stand out” above the competition.
“The first day of recreational sales in Canada appears to have been a success highlighted by the long lines and enthusiasm from shoppers,” the analysts said. “Seeing cannabis shoppers wait in lines as opposed to take the traditional easy illegal supply route is refreshing and bodes well for the recreational market in Canada.”
According to some investors, the cannabis sector is still in its “early innings,” so this volatility is to be expected.
“We are seeing high-profile companies, in addition to institutional investors, waking up to opportunities in the space,” Ben Kovler, the CEO of the publicly traded Green Thumb Industries, previously told Business Insider.