With the Canadian cannabis sector still in its infancy (we are still 10-12 weeks away from legalization, according to some of the most recent reports), the rampant consolidation investors have witnessed within the cannabis production space has truly astounded many, including myself.
Perhaps most astounding are the multiples companies are paying to swallow each other up; the recent acquisition of MedReleaf Corp. (TSX:LEAF) by Aurora Cannabis Inc. (TSX:ACB) for $3.2 billion is an example of what I have referred to in the past as outright irrational exuberance, the likes of which the world has not seen since the dot-com bubble.
The valuation multiples absent acquisition premiums are already in the triple-digits in terms of expected forward earnings for many producers, and with expectations of earnings based on survey data which I do not trust, as well as unreasonable expectations with respect to retail prices which I believe Canadians will not pay, ignoring factors such as tax hikes which are likely to take effect (take a look at liquor taxes, eh?), there is no doubt in my mind that this entire sector has been mispriced by financial markets to a degree I cannot find a comparable for (except maybe cryptocurrency).
Shorting cannabis producers remains a difficult and expensive exercise, however, I am certainly considering paying the borrow premium to add some exposure to the downside in this case. In my lifetime, I have never seen this sort of reckless acquisition behavior, and would encourage investors looking to profit from downside to take a deeper look at companies like Aurora at this point in time.
Invest wisely, my friends.
