Report on Business writers Tim Kiladze and Mark Rendell’s brilliant, detailed account of how Bay Street cashed in on the market’s cannabis frenzy and then left investor portfolios to endure the resulting carnage contains the following:
“With little access to fresh cash, Canada’s licensed producers now face a new reality. They have spent years focused on financings to fund their expansions, paying little mind to positive cash flow. Without new capital, they will have to scrap construction projects and scale back growth plans. ‘The vast majority of the companies are going to go bankrupt,’ said Igor Gimelshtein, the former chief financial officer of MedReleaf Corp.”
These words immediately reminded me of the technology bubble which shouldn’t be a big surprise – I’ve been comparing the late 1990s to the surge in cannabis IPOs since at least early 2017, when I wrote, “Referring back to technology stocks in the late 1990s, it is entirely normal for a new, high growth market sector to see an investment bubble grow and burst before sustainable profit growth begins. The marijuana sector may not play out that way, but it is a definite risk to investors.”
The portfolio losses as the tech bubble imploded and the recent losses in cannabis stocks did not occur because investors over-estimated the eventual scale of the opportunity. To the contrary, these finance bubbles occurred precisely because the future growth was so readily apparent.
When a long-term business opportunity in a nascent industry is so undeniable, investors race to get their money involved. Investment bankers are only happy to find more and more related companies to sell to investors and over time, the quality of each stock going public deteriorates while the prices investors pay continues to climb.
Investment manias – tulip bulbs, South Seas, Japan in the 1980s – are all similar in that they represent avalanches of investor funds that comes in faster than the money can be intelligently allocated to businesses with solid long-term prospects.
Ludicrous valuations – cannabis industry leader Canopy Growth Corp was trading at 138.1 times revenues in October 2018 – and a seemingly endless chain of initial public offerings is always a combination that investors should fear.
The good news is that, like investors that bought Apple Inc. when the iPhone came out in 2007, the big money gets made after an investment bubble implodes and the new industry proliferates through the economy.
-- Scott Barlow, Globe and Mail market strategist
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Here is the link to get the necessary information I think you need: http://www.osfi-bsif.gc.ca/eng/pp-rr/faq/pages/form1.aspx
--Nancy Woods, Vice President, Portfolio Manager and Investment Adviser with RBC Dominion Securities.
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