Newstrike Resources Ltd. (CVE:HIP) (OTCMKTS:NWKRF) (FRA:0N8) has experienced a really rough go in 2018. The unending drumbeat of selling—save for a mild March bounce—has been relentless ever since CanniMed Therapeutics left them at the alter. Now that Newstrike shares have completed their round-trip from the pre-acquisition $0.50 area, we look into whether HIP deserves a second look from investors.

It only seems like yesterday that Newstrike Resources was the talk of the cannabis industry. From its genesis as one part of a 3-business consortium closed on May 29, 2017—to major acquisition target less than six month later—its meteoric rise and fall somehow still manages to captivate the minds of many cannabis investors. It’s the quintessential rags-to-riches unicorn story, fraught with investors who made millions and equally littered with unfortunate bagholders and those who pushed their luck too far.

In essence, Newstrike is the face of the Tier-3 market as a whole. HIP’s predicament is extreme, but not atypical versus its peer group.

Although the 20 million-plus volume days have long since vanished, Newstrike is still among the most heavily traded small cap cannabis issues around. With an average 3-month volume of around 1.85 million shares traded/day, the issue is still resolutely followed by many.

Caught up in the recent sector buzzsaw, Newstrike is continuing to display relative weakness. The stock is down ↓22.38% since June 22, mirroring Canopy Growth’s swoon and moderately underperfoming the small cap cannabis space in general. There’s still no evidence of sustained resilience which would suggest prices can overachieve once the sector stabilizes. In short, price action has shown no signs of downside deceleration.

At this point, investors can only hope the term “it’s always darkest before dawn” applies in this instance.

Why Has Newstrike Resources Remained So Weak?

While it’s true most of Newstrike’s peers have been remained exceedingly weak to various degrees since the cannabis bubble popped in January 2018, HIP has been notoriously so.

Simply pull up a chart of Invictus MD Strategies Corp., Emblem Corp. or many other names, and the comparison becomes stark. Most small cap cannabis issues have staged temporary relief rallies on three or four occasions; beyond Newstrike’s February 29-March 20 bounce, price action has careened straight down.

Besides the obvious CanniMed non-acquisition faux pas, why has Newstrike received the butt end of such selling pressure? In my estimation, it can be attributed to a confluence of factors.

For starters, it’s impossible to overstate how much of a truly insane valuation Newstrike was afforded at its January 2018 peak. At the January 9 high of $3.30/share, the company was valued at around $1.35 billion dollars—before it had completed its first Niagara harvest. Even today, Newstrike’s estimated potential near-term aggregate annual production will only be approximately 27,500 kg of dried cannabis; small potatoes in today’s present environment.

Given such fundamentals, a substantial and protracted sell-off was not only in order, it was a requirement.

Secondly, Newstrike’s early marketing and branding advantage evaporated quickly. While the early enlistment of iconic Canadian band The Tragically Hip brought the company substantial investor buzz early on, the effect was short-lived.

Of course, the CanniMed fiasco was most culpable in diverting investor attention—but it was’t the only factor. Cannabis sector maturation and exploding valuations took the industry from pricing-in Canadian market fundamentals to pricing-in market potential on a global scale. Domestic legalization talk has expanded to the real possibility of legalization throughout many U.S. states, Germany and several E.U. countries. Cannabis multiples are now being driven by international scale and product innovation—not necessarily by how much cannabis one produces.

While The Tragically Hip are as much Canadiana as maple syrup or hockey, they don’t get much play beyond our borders. What started out as a substantial advantage for Newstrike Resources quickly faded into obscurity once investor focus went global.

Thirdly, I don’t see much in the way of visibility in terms of cost of production, average yields, or other key business metrics. Of course, this may change as the company has begun harvesting at its Niagara facility. But without being able to compare yield and production costs versus larger regional operators like Aphria or The Hydropothecary, it’s hard to ascribe Newstrike’s price competitiveness against the rest of the market.

I look forward to additional transparency once operations ramp up to full capacity in the coming quarters.

Is The Bottom In Place?

In summary, I don’t believe there’s enough evidence to make that assertion. Despite a share price which has declined ↓84.84% from its peak, Newstrike Resources is still a $276 million dollar company with only 15,000 kg coming online for the opening of the Canadian adult-use cannabis market. When you compare this valuation against peers like Maricann Group Inc. ($214 million market cap), which will have 95,245 kg annual dried flower capacity by Q4 2018 and has obtained key Good Manufacturing Practice (GMP) certification in the European Union, valuation still appears elevated.

The company did list a cash position of $88,448,004 as of March 31, 2018. Obviously, that’s a big element in the equation here. Yet, the company still felt need to engage in a $40 million bought deal public offering in May, with the stated proceeds to be used for growth initiatives, working capital and general corporate purposes. With such a strong cash position, why dilute shareholder capital even further if significant cash burn rates weren’t expected in the coming quarters? Today’s strong cash position might not be as robust as it appears.

None of this should be construed as a slight to Newstrike Resources in any way. The company’s Up Cannabis brand is well presented and looks ready to hit the ground running once legalization takes shape in October. By all accounts, the company has moved on from unfortunate circumstances and executed their business plan meticulously. The fact that Newstrike closed a February 22 over-allotment option at $1.32 per unit, with the share price trading significant below, was testament to the investment community’s faith in the company. There’s no evidence this faith has wavered.

However, with a myriad of higher-yielding and innovative competitors parked at similar relative valuations—some substantially below—it’s hard to see a compelling bottom call case. It matters not that Newstrike is perhaps the most oversold of any cannabis stock on the Canadian market today. Investors must look objectively and compare business prospects based on today’s fundamentals.

We wish the company the best of luck, as no company is more deserving of an substantial bounce then Newstrike Resources. We just don’t necessarily see a compelling reason why that takes place beyond sector norms. We would love to be proven wrong.