MedReleaf Corp LEAF, one of the major licensed cannabis producers in Canada, started trading on the TSX on Wednesday and its debut was far from pleasant.
After opening at C$9.50 ($7.04), shares lost 22 percent, closing at C$7.40 ($5.48). According to Bloomberg data, this drop marked "the largest decline for a sizable Canadian IPO in 16 years."
Despite the poor performance, MedReleaf remains the second-largest publicly traded medical cannabis company in Canada, only trailing Canopy Growth Corp WEEDTWMJF. Bears continue to pile up, as many investors believe the whole marijuana sector is overvalued, especially after Health Canada introduced some modifications in its medical marijuana program that could increase competition and cut reimbursements.
Are MedReleaf bears right? How does the stock’s current valuation look?
Benzinga reached out to Alan Brochstein, author of the 420 Investor, who shared a more bullish view of the issue.
"I have been negative on Canadian LPs [limited partnerships], probably too loudly for some," Brochstein told his subscribers Wednesday, "but I am on board for a rally, in case it's not clear. I think for those who can, LEAF, now 7.49, is a screaming buy. I don't expect that the lows are in for all stocks necessarily or that a new bull market started today, but I see a nice pop ahead."
A Bullish View
The timing was unfortunate, Brochstein said, pointing out that investors were concerned about MedReleaf's business and Veterans Affairs Canada's (VAC) new reimbursement policy. "However, I think that’s a minor issue [because] MedReleaf is one of the best LPs," he said in a phone interview Thursday.
The IPO comes at a time where the cannabis industry has seen "a lot of capital raised and a lot of new names... it's kind of confusing."
Brochstein said, "The market kind of peaked in April, and MedReleaf priced its IPO at the backend of the peak, instead of when the market was going up. This led people to think there was an issue with the price, which seemed too high compared to the price of a private placement conducted last year."
Brochstein doesn't agree with that view.
"They were a private company at the time, and were not even talking about going public. So, it makes sense that the price was lower than if the company was public," he explained.
"Unlike all these other LPs that have come out," Brochstein explained, "these guys have huge amounts of production already and have already proven that they know what they are doing. So, there is very little execution risk with these guys; this is a very strong team."
Having said this, Brochstein noted it's nice to see average retail investors being able to enter the stock at a price similar to what institutional investors get.
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