Is the cannabis market overvalued?

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Cannabis producers are reported to be overly optimistic, but companies like GreenStar Biosciences Corp. (CSE: GSTR) have an asset ready to change the sector dynamics

The sales forecasts of cannabis producers in Canada could be much “too aggressive”. This could lead to a decline in their stock market shares, warns a CIBC analyst.

CIBC Capital Markets analyst John Zamparo believes that the income and profit expectations of Canadian cannabis producers are “unfeasible”. “There is no guarantee, but we could see a significant drop in share value for many players in the industry,” he writes.

In a research note, the analyst estimates that producers’ cannabis sales will not be $6.5 billion next year (2020), but rather $2.2 billion, 66% less than expected. For 2021, CIBC’s analyst anticipates realistic sales of $3.3 billion for producers, compared to a forecast of $7.5 billion (56% lower).

John Zamparo points out that his estimates do not include cannabis sales by international producers. “But the fact remains that for many stocks, expectations are incredibly aggressive,” he says.

Stocks fall

Since the legalization of the sale of cannabis for recreational purposes in Canada on October 17, 2018, the results of producers have changed.

Over the past 11 months, the Marijuana Index has declined by 61% on the Toronto Stock Exchange. For example, the share price of Ontario producer Canopy Growth has dropped 55% since its peak on October 15. The value of the stock fell from $73.75 to $32.85. Canopy Growth fired its co-founder and CEO Bruce Linton last July when profits were slow to materialize.

Gatineau-based cannabis producer HEXO is also struggling on the stock market. Its stock has lost nearly 50% of its value since its peak at the end of April. HEXO’s stock, which was worth $11.11 on April 29, ended at $5.46 last Thursday.

HEXO, which is one of the largest suppliers to the Société québécoise du cannabis (SQDC), has seen many senior executives sell shares they owned in the company in recent months.

A company with a hidden asset

In context of this recent downfall and sceptical predictions, there are companies that continue to record good results. GreenStar Biosciences Corp. (CSE: GSTR) is an investment company with a unique talent to identify and nurture cannabis companies with proven operating histories like their partner company, Cowlitz County Cannabis Cultivation Inc.

Cowlitz is a producer and distributor of high quality cannabis products available at 20% of retailers in Washington state. Thanks to GreenStar’s support, Cowlitz became a leader in the market as they offer products with the highest quality, THC levels, and at lower prices than the competitors. They regularly generate $4 million in quarterly revenue, and at the end of 2018 recorded a revenue of $14.6 million.

GreenStar built their business strategy around creating a portfolio of top cannabis companies in North America, and they have an asset that helps them achieve it. The company started a joint venture with Progressive Herbs Inc. called Capri, that makes Capri an exclusive owner of their patent-pending proprietary cultivation technology, which stands behind Cowlitz’s success. This technology allows them to grow a high quality plant with less resources and faster harvest times. The tested plants were reported to be harvested in approx. 72 days which is faster than when using traditional greenhouse cultivation methods.

With the reduced operational costs and expected increased revenue profits, GreenStar can put any marijuana producer in a very competitive position. It will be interesting to see how their portfolio grows and how strong they become on the North American cannabis market.

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