Pot Investors Go Up in Smoke

Marijuana investors are stampeding for the exit these past few days. Why? Well, in keeping with herd-like behavior, there isn’t a rational explanation. Rather, this is a classic example of investor anxiety running rampant.

Here’s what stoked a fearful run for the exit: Bill Blair, leading the Canadian Federal government’s legalization effort, commenting in the Globe and Mail on the timeline for recreational legalization stated, “We will take as much time as it takes to do it right. I’m pretty reluctant to suggest a specific time frame, frankly, because I don’t know how long this will take in each of our 10 provinces and three territories.”

http://www.theglobeandmail.com/globe-investor/investment-ideas/marijuana-stocks-drop-as-trudeaus-pot-czar-says-canada-wont-rush-into-legalization/article34230589/

It’s All Been Said

So, this comment alone is reason enough to bolt from pot stocks en masse? The thing is, Blair is not saying anything that hasn’t already been said. Consider the following:

  • November 27, 2016. The Globe and Mail quotes Anne McLellan, marijuana legalization task force chair, who says that marijuana will be moved “… from a criminal regime, where this was an illegal substance with criminal sanctions – some of them very serious – to a legalized product in a regulated marketplace. It’s important to move slowly, and deliberately, in implementation. [emphasis added]

http://www.theglobeandmail.com/news/politics/report-on-marijuana-legalization-in-canada-due-this-week/article33065608/

  • November 30, 2016. The Financial Post (FP) quotes Brendan Kennedy, CEO of private equity firm Privateer Holdings, “It’s a long path to legalization. Investors sort of have these expectations baked in that are unrealistic. I think January 1, 2019 would be optimistic … even 2020, when all said and done.” FP goes on to repeat Anne McLellan’s statement that ‘it is critical the government goes slow on reforming the laws. [emphasis added]

http://business.financialpost.com/news/agriculture/long-path-to-legalization-marijuana-companies-not-convinced-of-legal-recreational-market-by-2018

  • January 2, 2017, Canadian Broadcasting Corporation (CBC) reports “While the federal government plans to table its new marijuana legislation in the spring of 2017, it will take much longer to study the bill and eventually pass it into law. It will likely be at least 2018 by the time the legalization process is complete.”

http://www.cbc.ca/news/canada/toronto/marijuana-toronto-2017-1.3896575

  • March 2, 2017, the Canadian Department of Justice website states, “In the spring of 2017, the Government of Canada will propose to Parliament and Canadians a new legislative framework for the legalization of cannabis.”

Addressing the issue of when legalization will happen, the website states, “It’s a serious, complex matter that will take time.” [emphasis added]

http://www.justice.gc.ca/eng/cj-jp/marijuana/info.html

The Facts Please

There you have it. No new information was announced. Neither Bill Blair nor the Canadian government changed the game.

Any informed investor knows that, owing to the nature of the legal and consultative process, it is not possible to give an exact date on which marijuana will be legalized for recreational use. And any of the listed marijuana companies worth their buds know full well that the magic date may not happen until 2018, 2019 or 2020. And these companies have organized their business model accordingly.

On the face of it, the fundamental nature of the business of producing, distributing and selling marijuana remains the same; and the prospects for a massive market remain the same (report from Deloitte estimates a +$22 Billion industry in Canada – http://www.businessinsider.com/deloitte-weed-could-be-226-billion-canada-2016-10). Then why are investors panicking?

Chalk it up to blind fear and a crowd mentality where one lemming follows another off a cliff simply because that’s what the other guy is doing.

Unfortunately, too many investors are short-term players who pay too little attention to available information. These are the investors who foolishly sell at a loss, because they’re consumed with fear, then kick themselves when the stock bottoms and resumes its upward climb. The winners are those who sit tight or, better yet, realize the opportunity and buy stock at depressed levels.


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Enter Buddha

When fear and panic arise, accept these feelings. Recognize and make friends with them. But do not take action while in their grip. These feelings will pass. And once they pass, and your mind is clear, only then may you make wise decisions.


And Then There’s Organigram

A few days before the general downturn among pot stocks, Organigram Holdings Inc. (CVE:OGI) was hammered owing to filing of a class action lawsuit. The basis of the lawsuit is a claim that the company sold pot containing unapproved pesticides.

Now, if OGI had intentionally or grossly negligently spiked the weed to juice harvests, then it may well be on the financial hook for some serious dough beyond the retail cost of product. As importantly, if not moreso, the OGI brand would take a big hit, with the possibility that it would not recover. And a serious haircut to OGI’s stock value would be warranted, at least in the short term.

But none of the facts point to OGI being guilty of corporate shenanigans. Which brings up the question: what’s the deal with the extreme reaction by investors? Did investors inform themselves of all details concerning this issue or did they simply scramble to sell as soon as the plaintiff’s law firm informed the media of its filing? My guess is the latter.

The Facts Please

An exhaustive internal corporate investigation was unable to determine the source of pesticide traces. And Health Canada responded to the issue by:

  • Stating that it had not received any patient complaints about adverse reactions from product recalls;
  • Confirming its own test results determined that the affected products represent a low health risk; and
  • Declining to take any enforcement action against OGI.

That’s all fine and good but couldn’t OGI still be held liable for damages, or agree to a settlement payment just to make the lawsuit go away? Yes, to both of these questions.

Fortunately, the company employs a skilled management team that has taken the following actions to diminish any financial fallout from the lawsuit and, in the process, bolster its performance and its brand:

  • All potentially affected product were voluntarily recalled and destroyed;
  • Enhanced testing protocols, exceeding Health Canada’s regulatory requirements, have been implemented;
  • For the purpose of transparency, as of mid-March, 2017, future test results will be posted on the company’s website;
  • All customers who purchased affected product have been issued a credit equivalent to their cost;
  • According to OGI, the majority of its customers have accepted, and are using, the credit; and
  • Financial exposure has been minimized by allocating sufficient funds to cover losses related to the recall.

In addition, OGI’s currently suspended organic certification, which sets it apart from its pot growing peers, will likely be reinstated by Ecocert in March or April, 2017. Ecocert validates organic standards (http://www.ecocert.com/en).

Crystal Ball

Where will OGI go tomorrow and beyond? As you know, stock market investing does not offer guarantees. But if we keep our eyes open, if we take the time and exert energy necessary to fully inform ourselves about a particular investment, and not let emotions carry us away, then we stack the odds in our favor as far as good, and profitable, decision-making is concerned.

Full Disclosure: As of the date of this article, I’m a chilled shareholder of OGI.