The irrational market euphoria I’ve warned investors about in recent years in the Canadian cannabis sector has largely dissipated now.
Various exchange traded funds (ETFs) have popped up during the run up in the valuations of these producers and have promptly sold off, as investors increasingly showed their concerns around long term profitability in this sector by hitting the sell rather than bid on the broader sector.
In this article, I'm going to touch on the bull-and-bear case for owning an ETF like the Horizons Medical Marijuana Life Sciences ETF (TSX: HMMJ), which tracks this sector.
Those bullish on a recovery in cannabis prices have noted that growth in the long term acceptance of various cannabis derivatives such as CBD products, oils, and various medications produced using cannabis inputs to treat medical conditions will drive demand in the sector.
Recreational use has not grown to the degree initially expected (as I indicated many times was obvious before), however, good growth prospects on the demand side of the equation still exist today. If this sector can trim supply in the near term to balance out the glut, we could indeed see a more profitable sector down the road.
These expectations of re-balancing the supply and demand have an uncertain timeline, and those bearish on the sector point out that it will likely take a lot more time, and be a lot more painful than many care to recognize, for this re-balancing to take place.
Positioning one’s portfolio too heavily in the highly speculative growth stocks such as small Canadian cannabis producers right now is simply broadly viewed as imprudent heading into a recession, a view I take as well.
Invest wisely, my friends.
