Shares of Tilray Inc. and Canopy Growth Corp. have climbed more than 20 per cent since the start of the year, while Cronos Group and Aphria Inc. are up more than 10 per cent. The ETFMG Alternative Harvest exchange-traded fund, which targets the global cannabis industry, is up 5.8 per cent in that period.

A speculative “green rush” fueled by the legalization of cannabis in Canada and some U.S. states faltered last year, as investors grew worried about oversupply and whether companies could bring enough customers out of the black market. Uncertainties over U.S. regulations and revenue shortfalls further weighed on the sector.

Investors are now betting that some of these companies have become undervalued. Canopy, for instance, trades 10 per cent below the average target price among the 22 analysts that cover it, according to Refinitiv data. Its forward price-to-sales ratio, meanwhile, is at 16.4, well below its peak of 32.1 it hit in January 2019 and more than double its low from November.

“We went through the golden age and then we fell into the dark ages where valuations were assuming that these companies were just dead,” said Michael Underhill, chief investment officer at Capital Innovations.

Underhill’s fund owns shares of Canopy and is increasing its stake in companies such as CBD beverage maker Alkaline Water Company, cannabis financing company Ianthus Capital Holdings, and multi-state cannabis operator Harvest Health and Recreation Inc.

Others are focusing on companies that are not pure plays on cannabis, which they expect to better weather a tough regulatory environment in the U.S.

Illinois this year became the 11th U.S. state, along with the District of Columbia, to allow the recreational sale of cannabis. Yet a ballot measure to legalize recreational use in Florida, the nation’s third most-populous state, will likely not appear until at least 2022, according to a note from research firm Jefferies.

“Investors have realized that the rollout from a regulatory perspective isn’t as efficient as it should be,” said Jason Wilson, who focuses on cannabis research and banking at ETF Managers Group, which manages the US$810 million ETFMG Alternative Harvest ETF.

He is recommending shares of e-cigarette maker Turning Point Brands Inc.

Dan Ahrens, portfolio manager of the US$49 million actively-managed AdvisorShares Pure Cannabis ETF, believes the sell-off in cannabis shares was exacerbated by aggressive short-selling, or investors betting against the prices of cannabis stocks.

He is focusing on smaller companies such as Innovative Industrial Properties Inc., a real estate investment trust that leases greenhouses to grow medical-use cannabis, and cultivators such as Village Farms International and OrganiGram Holdings . Short interest in both stocks has fallen by half over the last six months.

At the same time, he is underweight large Canadian companies such as Tilray in favour of companies that will focus more directly on the U.S. market.

There are “still too many companies in the space,” he said. “Some will make it and some won’t.”

–Reporting for Reuters by David Randall.

The post Bargain hunters fire up rally in cannabis stocks appeared first on Country Guide.

Short interest in cannabis stocks, which reflects bets that prices will fall, has risen 55 per cent for the year to date, handing short-focused investors more than $2 billion in profits over the period, according to data released by research firm S3 Partners on Monday (all figures US$).

More than 800 cases of a vaping-related lung disease and 12 deaths across 10 U.S. states have so far been reported by the U.S. Centers for Disease Control and Prevention, leading states such as Massachusetts to impose temporary bans on all vaping products. Those numbers are expected to climb.

A pushback on vaping could put further pressure on companies such as Massachusetts-based Curaleaf Holdings and Edmonton-based Aurora Cannabis, whose stocks suffered drops of 10 per cent or more after missing revenue projections in their most recent quarters.

Fund managers say increased short selling is a sign that the industry is transitioning from a can’t-lose proposition to a shakeout that will leave only the highest-quality companies standing.

“We’ve been through the golden ages in the sector where you had high growth models and unsustainable price speculation because it was a hot new idea,” said Michael Underhill, chief investment officer at Capital Innovations, who has focused on cannabis stocks. “Now the gold rush talk is gone and you’re going to see a rationalization of the business.”

As a result, Underhill is focusing more on companies like iAnthus Capital Holdings, which recently hired senior executives from Coca-Cola, Nike and Hewlett-Packard, and is focused more on managing its balance sheet for long-term growth than expanding at any cost, he said. Shares of the company are down 65 per cent for the year to date.

“This is going to start being a story of haves and have-nots very soon,” he said.

Short-selling will likely continue to weigh on share prices until legislation allows more giant fund companies such as Fidelity Investments and T. Rowe Price to take larger positions in cannabis companies, said Brett Hundley, an analyst at Seaport Global.

“It’s going to be a while before big institutional investors can access the cannabis space and that takes away the incremental buyer that could push stock values up,” he said.

That lack of support from capital markets will also weigh on companies trying to expand in newly opened markets such as Illinois and Massachusetts, making it harder for those with weak balance sheets to survive, he said.

Yet some fund managers maintain that the short-selling is already overdone, with the possible health benefits of cannabis boosting its long-term appeal.

“There’s a little bit of a feeding frenzy happening right now and everything good is getting thrown out along with the bad,” said Dan Ahrens, portfolio manager of the actively managed AdvisorShares Pure Cannabis ETF.

— David Randall is a Reuters reporter in New York City.

The post Short-sellers circle cannabis stocks as profits dwindle appeared first on Country Guide.

The issue is not simply the unpredictability of weather. Instead, fund managers say, they are struggling to model how extreme weather events from droughts to more powerful storms will affect commodity prices and, in turn, spending by farmers on equipment or seeds.

In November, the U.S. government published a report that found climate change will boost costs in industries including farming and energy production by increasing the frequency and severity of storms. The U.S.-China trade war has also clouded the outlook for U.S. farmers.

Early estimates of crop and livestock losses from this year’s floods are approaching $1 billion in Nebraska alone, and damages are expected to climb much higher for the region . The U.S. Department of Agriculture, meanwhile, has no way to compensate farmers for crops that were damaged when floods overtook their record-high stockpiles of grain.

“I just don’t know how to value these companies now,” said Christopher Terry, a portfolio manager at Hodges Capital in Dallas. “It’s harder to invest around a theme when you’re talking multi-decade impacts.”

More extreme weather in the Midwest, for instance, will boost the cost of grains for feed, which will cut margins of egg producers like Cal-Maine Foods, he noted. Barge companies such as Kirby Corp. that move commodities down the Mississippi River may have more days that operations are out of service because of flooding, he added.

Other fund managers said they were seeking agricultural companies that might actually benefit from more severe weather.

Michael Underhill, chief investment officer at Capital Innovations, said he is focusing on midstream companies such as grains merchant Archer Daniels Midland and production companies such as equipment maker Deere and Co. that may benefit from greater volatility in commodity prices. ADM has a proven track record of hedging commodity bets, he said, while Deere may benefit if higher crop prices following extreme weather prompt farmers to invest in new machinery.

“If you think the next 10 years will look like the last 10 years you are in a for a rude awakening,” he said.

Looking for winners

Incorporating the impact of climate change on agricultural stock valuations is something Wall Street analysts from firms including William Blair, Wedbush and R.W. Baird have largely avoided because it is hard to predict the impact on any one quarter or season. Analysts at these firms follow companies ranging from Bayer to retailer Tractor Supply Co.

“If weather conditions continue to have a more unforeseeable impact on agro business the best way to model this would be… to increase the beta-factor within the discounted cash flow model used by me. And no, I have not yet done so,” said Ulrich Huwald, an analyst who covers Bayer.

Private research companies like Four Twenty Seven have stepped into that void by providing quarterly climate risk scores for specific companies that focus on the impact of climate change events ranging from wildfires to rising sea levels on supply chains, operations, and trading markets.

Lucas White, a portfolio manager at GMO, runs one of the few actively managed mutual funds that target companies that may be significantly affected by climate change. While his fund has outsized positions in solar companies such as SolarEdge Technologies and First Solar, he also focuses on potash and phosphate producers that may see increasing demand as more severe storms wash away soil nutrients.

“Nobody knows what will happen with commodity prices and it’s more or less impossible to predict,” he said. “But farmers spend all this time getting their soil to be very productive and all of a sudden a huge downpour comes and they have to start from scratch again. It’s very difficult to produce agriculture in a world that is increasingly impacted by climate change.”

— David Randall is a Reuters reporter and author based in New York.

The post Climate change has U.S. fund managers adjusting agriculture investments appeared first on Country Guide.