At this point in time, I really do believe that financial markets are starting to price in appropriate levels of risk, almost everywhere.
The Canadian cannabis sector tracked by the Exchange Traded Fund (ETF) Horizons Marijuana Life Sciences ETF (TSX:HMMJ) has taken a nosedive even before this coronavirus pandemic took off. However, I think there is far more risk that is not being priced in right now.
The key risk in Canada’s cannabis production space is insolvency. My belief is that this risk is not fully priced in right now, given that we’re still using a multiple of sales to come up with a valuation number in a sector that continues to bleed cash.
The key catalyst that I think could take the HMMJ much lower is an insolvency among one of the larger producers in this space. I think such a scenario is likely this year.
There are dozens of reasons why I will continue to avoid the Canadian cannabis space. I would encourage investors to do the same.
Once the dominoes start to fall and banks start calling lines of credit and cutting these producers off, we’ll see a level of pain in the sector that many thought was unimaginable a year or two ago.
I think we could start seeing a number of bankruptcies take place in Q2, given the economic reality we’re now in and the rate of global economic deterioration we’ve seen in recent weeks.
Invest wisely, my friends.
