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Canadian retail investors no longer the only game in town for cannabis stocks

Shares of Canadian-based cannabis producers are increasingly finding a home in the portfolios of three other kinds of investors: American, institutional and unwitting

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Last week’s wild ride for pot stocks, which saw shares of B.C.-based marijuana company Tilray Inc. fly above US$250 apiece at one point, before closing Friday at US$123, underlined that it is no longer just Canadian retail investors seeking exposure to the cannabis sector.

Lately, those shares of Canadian-based cannabis producers are increasingly finding a home in the portfolios of three other kinds of investors: American, institutional and unwitting, possibly.

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“In meteoric fashion, some of the now-large cannabis companies have graduated from the (TSX Venture Exchange) to the (Toronto Stock Exchange), and in some cases the S&P/TSX Composite Index,” said the recently released 2018 proxy season review from Kingsdale Advisors.

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“While this has created huge returns for seed investors, it has also dramatically changed shareholder bases: large cannabis companies have started to see a turnover from retail to institutional investors, who place more importance and scrutiny on board governance.”

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As an example, Kingsdale pointed to the $175-million bought deal announced in January for leading Canadian pot producer Canopy Growth Corp., which was led by GMP Securities and Bank of Montreal’s capital markets unit.

Bloomberg data also shows that investors in Canopy now include the Public Sector Pension Investment Board and the British Columbia Investment Management Corp., among others.

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“In fact, our analysis of the major companies in the cannabis space shows a considerable increase in the number of institutional shareholders: in some companies, institutional ownership has increased threefold,” Kingsdale said.

Broader investor exposure to the cannabis sector could potentially arise through index funds as well.

This is because, as share prices of cannabis companies have shot up recently and their market caps have grown, those marijuana-related equities have moved onto major stock exchanges — and then, into the holdings of funds trying to track big stock indices.

The iShares’ Core S&P/TSX Capped Composite Index ETF, for example, dates back to 2001, long before cannabis companies were hitting billion-dollar market caps. It aims to replicate the performance of that capped index, and has attracted assets under management of more than $4 billion, making it one of the biggest in Canada.

It now counts leading Canadian cannabis producers Aphria Inc., Aurora Cannabis Inc. and Canopy Growth among its holdings, albeit just a small percentage of them.

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Greg Taylor, portfolio manager at Toronto-based Purpose Investments, noted that the growing market caps of some Canadian cannabis producers have put them on the same level as the country’s biggest companies.

“Indices that are built to track off of those really can’t ignore them anymore,” Taylor said.

… a considerable increase in the number of institutional shareholders: in some companies, institutional ownership has increased threefold

Kingsdale Advisors

Then there is another source of cannabis investor: the United States, where moves by Canopy and Tilray to list their shares on U.S. stock exchanges have attracted new interest and investment.

“Despite obvious logic, we’ve seen U.S. retail investors pile into the U.S.-listed marijuana stocks,” said short seller Citron Research in a recent report on Tilray.

While Canadian investors have been dabbling in cannabis for a few years now, Taylor said the announcement in August that U.S.-based alcohol giant Constellation Brands Inc. aimed to invest at least $5 billion in Canopy managed to grab international attention.

Yet those U.S. investors want in at a time when there is a dearth of U.S.-listed pot stocks to trade. Currently, there are only three big names: Canopy, Tilray and Cronos Group Inc. Aurora has said it is also eyeing an October listing on a U.S. exchange.

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“So I think you get a bit of a scarcity factor there,” Taylor said. “We’ve broadened out from just really being a Canadian story, (to now) more of a global story.”

One of the voices sounding the alarm on pot stocks has been none other than prominent U.S. television personality Jim Cramer, of Mad Money fame, who recently took note of the amount of cash pouring into cannabis ahead of Canada’s legalization of the drug next month.

“October 17th is not going to produce the ‘high,’ so to speak, that people think,” Cramer said Friday on CNBC. “I think that there’s way too much money coming into this and prices are going to crater.”

• Email: gzochodne@nationalpost.com | Twitter: GeoffZochodne

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