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Business Briefing Why stock-picking is so crucial now for cannabis investors (beyond buying low and, um, selling high)

Briefing highlights

  • Picking cannabis stocks
  • Markets at a glance
  • They don’t call it Dollarama for nothing
  • Household debt burden creeps higher
  • U.S. retail sales barely rise

Picking the right stocks is always important, obviously, but it’s crucial for cannabis as the sector becomes all the rage.

It’s still a young industry, but with a lot going on in the run-up to the mid-October legalization of recreational pot in Canada. It comes amid consolidation, investment and public listings, and as major players in other industries circle.

“Stock-picking has been important during this recent move,” AltaCorp Capital Research said in a report.

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“We also believe it is worth highlighting the importance of stock-picking during this latest rally, as while a rising tide has tended to float all boats, the lift has been quite varied, even between large-cap names.”

The entry of Constellation Brands Inc. via a huge investment in Canopy Growth Corp. has other big beverage names considering their options and studying opportunities, seeing as how pot is expected to eat into their business.

Tobacco and pharmaceutical industries should also be watching.

“Selecting opportunistic and higher quality names will continue to be increasingly crucial moving forward, as companies will be expected to begin to deliver results in the coming quarters, with the start of recreational sales next month,” AltaCorp said.

“Activities such as [mergers and acquisitions deals] and investment partnerships are other important catalysts to position for.”

AltaCorp noted that the pot frenzy has been led by large-capitalization companies.

“While in the more speculative phases of some markets, small caps are expected to outperform, this most recent move in the cannabis sector has seen large-cap names outperform considerably relative to smaller names,” the firm said.

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“The average return of the large-cap names has been more than twice that of the smaller-cap names (124 per cent versus 58 per cent) since Aug. 15, which marked the start of the latest rally on the back of the announcement of the $5-billion investment by Constellation Brands … in Canopy.”

Several stocks tanked Thursday, however.

Speculation that Diageo may be next to link with a Canadian producer has “added fuel to the rally,” lifting, for example, the shares of Aphria Inc., Cronos Group Inc., Tilray Inc. and Aurora Cannabis Inc..

“We also believe these developments have put the sector on the radar of more U.S. investors, who have begun to enter the space primarily through companies with listings on primary exchanges in the U.S., such as Canopy, Tilray and Cronos,” AltaCorp said.

“The increase in U.S. volumes is particularly noteworthy when compared to the much smaller relative increases in volumes on their Canadian listings.”

As for the companies themselves, Aphria has “benefitted greatly” from the speculation surrounding Diageo.”

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Bank of America Merrill Lynch analysts also noted in a research report how cannabis is “going mainstream,” and how major beverage companies are interested.

“We wonder which company will move next, and believe that either Diageo or AB InBev could be next, given the relevance of North America for them,” they said.

“However, we don’t rule out other firms potentially moving into this area. We believe that JVs and partnerships might be neutral to well-received by investors, while a large cash investment is likely to be questioned, given the nascent profile of the industry and the near-term dilution.”

(By JVs, they were referring to what in this case is the apt term joint ventures.)

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