Pot Stock Volatility Won't Ease Anytime Soon, BMO Banker Says

(Bloomberg) -- Pot stocks will remain volatile and marijuana supply challenged as the nascent industry struggles to find stability, says a Bank of Montreal executive who’s led some of the biggest deals in the sector.

“The share price volatility you’re watching is going to continue and it’s going to impact where we’re going," Dan Barclay, co-head of global investment and corporate banking at BMO Capital Markets, told reporters Wednesday after an investor event in Toronto. “Until you get to stability, which is probably two to four years from now, you don’t really know what the business is."

Pot stocks have tumbled for seven straight days amid supply shortages and concerns about valuations. Producers including Canopy Growth Corp. and Aleafia Health Inc. extended declines that began a day before Canada legalized recreational marijuana on Oct. 17. The Horizons Marijuana Life Sciences exchange-traded fund has plunged 28 percent over the period.

Barclay has been behind some of Canada’s biggest cannabis deals since BMO Capital Markets started offering investment-banking services to the burgeoning industry this year. That included advising Aurora Cannabis Inc. on its all-stock deal for MedReleaf Corp. in May, and helping arrange a C$200.7 million ($153 million) equity financing for Canopy Growth in January.

Barclay said the cannabis industry is an “an evolving market," with changes to business models, clients and pricing expected for the foreseeable future. He said the sector also faces excess supply in the long term.

BMO Capital Markets is getting approaches from those in the industry -- with some ideas that are better than others.

"We have lots of people who think they should be in the business, and we’re seeing lots and lots of pitches around things that are truly interesting and innovative, and things that are actually quite boring," Barclay said. “And so, no surprise that there’s a lot of activity out there."

The next shift will be moving away from producers and more toward other areas of the “value chain" that serves the industry, including pharmaceuticals, specialty brands, logistics companies and those involved in retailing such as point-of-sale systems and technology, according to Barclay.

“To me, that’s the next wave we’re going to watch," he said. “It is the evolution of the way the industry gets serviced."

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