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Canada has too many pot companies, expect more short attacks: Canaccord analyst

File – An employee prunes a marijuana plant, at a Fotmer SA, greenhouse in Nueva Helvecia, Uruguay, Wednesday, Jan. 30, 2019. (AP Photo/Matilde Campodonico)

Short seller attacks, shareholder activism, and consolidation will intensify in Canada’s cannabis sector, solidifying dominant players and weeding out weaker rivals, predicts Canaccord Genuity analyst Matt Bottomley.

Speaking at the Canadian Club of Toronto’s 2019 Cannabis Outlook event, Bottomley said while the industry on the whole has a “tremendous amount of legitimacy,” Canada has more publicly-listed cannabis companies than it needs.

“If you include every single company that has cannabis in its description, there are probably 100 or 200 of them. In Canada, we have three or four telecom companies [and] four, five, six banks, we don’t need 100 cannabis companies,” he told attendees on Tuesday.

The allegations of cannabis short sellers have wiped out billions in market value, sparked internal investigations, and prompted management overhauls.

A recent attack by prominent short seller Citron Research on Namaste Technologies Inc. (N.V) caused an investigation that led to the ousting of CEO Sean Dollinger on Monday. In December, Aphria Inc. (APHA.TOshares tumbled after a report by Quintessential Capital Management and Hindenburg Research accusing the company of buying Latin American assets at inflated prices.

“I think it’s going to be an increasing theme,” Bottomley said. “There is probably some justified criticisms out there in the market, depending on the companies and depending on how the market plays out.”

He expects future short seller reports will put a spotlight on overcrowding in the cannabis sector, though he warns investors should carefully weigh the findings against the author’s profit interest.

He said negative sentiment stirred up by public short attacks impacts the sector as a whole, scaring off long-term institutional investment that could that could help smooth out notoriously volatile share prices.

“You are affected no matter what producer you are,” he said. “Canopy, for example. Even though they are not named in any of those issues, I’m sure they hate this.”

Brian Wagner, chief executive officer and founder of Cannabis Compliance Inc., said corporate governance remains a “very overlooked area” in the cannabis sector, and expects to see more companies stumble on that front as the industry matures.

He likens the situation to a 14-year-old in Alberta who just got their learner’s licence – there’s potential to go fantastic places, but the risk of an accident is high.

“We haven’t got into too many accidents yet,” he told 2019 Cannabis Outlook event attendees. “I think more accidents will happen.”

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