Transcription: Rob gives his insight on the marijuana market

By November 7, 2017Transcripts

Paul Bagnell with guest host Rob Tétrault

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Paul:  We are back with my guest host Rob Tétrault. He’s a Portfolio Manager at National Bank Financial. He’s based in Winnipeg, but we’re lucky enough to have him right here in Toronto today. You told me during break that you get all kinds of phone calls from clients who want in to the marijuana stocks. I guess they’re asking you which ones are the winners. What do you tell them?

Rob: It’s kind of a phenomenon right now. We’re getting a whole bunch of phone calls. In Winnipeg where I am a proud Manitoban and proud to be from, Delta 9 this week, a CEO John Arbuthnot…actually John, great guy, he used to work for me and got into the business as a cold caller, now he is a CEO of an IPO listed company, $60 million company on the TSX Venture. That fueled some news in Manitoba. So, people are picking up their phone, they’re saying, “Wow, I want to be part of this. I want to be part of this.” People think you know, “If I had got on to Tech early how much money would I have made?”

Paul: Yeah.

Rob: So, a lot of people that don’t necessarily understand what he sector looks like and how it works, but I’m getting a ton of phone calls and you’re right, they’re asking me which ones to buy.

Paul: What is your response? You see risk here.

Rob: I do see risk. I think it’ll happen. I think there’s going to be retail recreational marijuana. It’s going to be sold. I do think that the provinces are going to control distribution. I think it’s the only way it can work. I think in Manitoba, my view is, we’re going to see Manitoba liquor and lotteries. You know, in Ontario it’s going to be the liquor distribution.

Paul: It is.

Rob: And I think the other provinces will follow suit. Maybe Alberta and Quebec won’t, maybe they’ll do private. But regardless, now at the end of the day you’re simply a farmer. You’re simply growing these plants to bring them to someone to sell. So, we know how big that market is. Much like the liquor market in Canada, you know, the gentlemen at the Seaport Motor Hotel in Churchill, Manitoba can only drink so many beers and the individual who’s, you know, smoking his marijuana is only going to smoke the same amount of marijuana he smoked last year. So, if you’re making that assumption, the Market Cap, if we’re spending $200 a year on marijuana, the Market Cap, the total Market Cap in Canada for recreational marijuana, should be a six to ten billion dollar valuation somewhere in there. If we look at the top, call it five stocks on the TSX, Canopy is at 3 billion, Aphria is at 1…I want to 4 or 5, and Aurora is at another 1.3. Just those three companies are already at that Market Cap.

Paul: So the sector you’re saying is overvalued?

Rob: I am saying the sector is overvalued as a whole. Now something needs to work itself out. Maybe Canopy will be the best player in there, maybe it will be Aurora. The thing is we don’t know the rules of the game yet. We don’t even know what the rules are going to be and yet people are already assuming that they are going to have all those profits. They are not even producing this marijuana yet. So, that’s a concern of mine.

Paul: There is a marijuana ETF. It’s called, The Horizons Marijuana Life Sciences IDX ETF ticket symbol HMMJ on Toronto. Is that a better way to play it if people insist on getting into this? Would you guide them towards an ETF rather than trying to pick individual stocks?

Rob: Yeah, because we don’t know the management right now. Whenever you’re looking at a company, it’s always important to look at the management, the track record, what the leverage is, how they’re doing, and what their vision is for the company. We have very little indication as to how they’re going to play it, the large players. These were very, very small companies that became large very quick. Canopy is a three billion dollar company. So, the ETF, you get everything. You get the small ones, you get the big ones, if you want to play the sector that’s what it’s going to be, but in my view, in five years when this whole thing is setup the whole sector will be worth 10 billion. That’s my view. So, if you’re buying Canopy or one of those, you’re either of the view that they will outperform their competitors, or maybe you’re of the view that Canadians will start smoking more marijuana, I don’t know, that’s possible, or you’re of the view that these companies will get a higher valuation than for example, the liquor equivalent. So, one of those things could happen, but if you’re doing that, that’s what you’re expecting.

Paul: That’s Rob Tétrault on the marijuana stocks and the risk he sees there.