Pot Stock Weakness Could Prompt Next Big Deal, Investor Says

(Bloomberg) -- Pot stocks continued a six-day rout Tuesday amid Canadian supply shortages, creating a favorable environment for the next big investment in the space, according to one investor.

Aurora Cannabis Inc. fell as much as 15 percent in its U.S. trading debut, Canopy Growth Corp. lost 12 percent and Tilray Inc. tumbled as much as 18 percent amid broader market weakness. This compounded a string of declines that began a week ago, one day before Canada legalized recreational marijuana on Oct. 17.

Investors appear disappointed in the lack of inventory, with several stores and websites running out of products in the first days after legalization, as well as a dearth of brand awareness, said Charles Taerk, chief executive officer of Toronto-based Faircourt Asset Management, which runs the C$50 million pot-focused UIT Alternative Health Fund.

Canadian cannabis retailers were sold out of about 46 percent of pot products, Cowen analyst Vivien Azer said, based on her survey of online retailers in five provinces. Meanwhile, more than 95 percent of customers surveyed across four provinces last week were unaware of the brands they had just purchased, according to GMP Securities analyst Martin Landry.

“We thought the sector was going to be weaker at the beginning of the month as we slid into Oct. 17 and we were kind of surprised that markets stayed pretty buoyant up until early last week,” Taerk said in an interview, adding that his fund is currently 23 percent in cash. “Not to say that a correction is ever overdue but we were prepared to a certain degree for some weakness.”

Investors shouldn’t be rushing to sell their holdings, Taerk said, especially since weakness in the sector could prompt the next big investment in the space, much like Constellation Brands Inc. bought into Canopy in August following two months of declines.

“It didn’t just happen out of nowhere, Constellation was watching,” said Taerk, who likes CannTrust Holdings Inc., Organigram Holdings Inc. and Aphria Inc. “They’re not going to invest when the companies are trading at all-time highs.”

The lack of Canadian pot inventory isn’t all bad, and is likely to be a modest positive for Canopy and Tilray, the two largest public cannabis companies, Azer said.

About 56 percent of Canopy Growth’s 144 products available were sold out in Azer’s checks, while Tilray, which doesn’t have licenses to sell cannabis goods in three of the five provinces she surveyed, saw a sell-out rate of 64 percent across its 22 products. Azer carries a buy-equivalent rating on both stocks. Aurora Cannabis and Aprhia also showed strong out-of-stock rates.

To contact the reporter on this story: Kristine Owram in Toronto at kowram@bloomberg.net

To contact the editors responsible for this story: Arie Shapira at ashapira3@bloomberg.net, Steven Fromm, Courtney Dentch

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