It’s no secret that the cannabis industry has been under-performing for a while now. In 2019, short interest in cannabis stocks has risen 55%. That, coupled with a plague of vaping-related lung disease and death that’s sweeping the United States, has caused investors to shy away from an already wounded space.
For the last six months, the Canadian Marijuana Index has trended consistently downward. It was at a high of $110.67 on March 21 and reached a low of $46.46 on October 1.
That’s a huge warning sign for investors that their hopes for the cannabis industry might be going up in smoke. However, a more careful examination of the industry reveals that not every sector is suffering.
Recreational Cannabis Stocks are Struggling…
Last month, the world’s second-largest cannabis company, Aurora Cannabis Inc. (TSX:ACB) (NYSE:ACB), posted Q4 financial results that were weaker than expected. The company raised $98.9 million CAD for the period ending June 30, but analysts expected Aurora to post sales of $108.3 million CAD, based on its earnings preview from July.
A similar thing happened in August to cannabis retailer Curaleaf Holdings Inc. (CSE:CURA) (OTCQX:CURLF). Analysts expected revenue of $49.8 million, but the company posted net revenue of $48.5 million, with a $24.4 million net loss cherry on top.
Both cannabis stocks suffered price drops as a result. While there are several factors to blame the revenue misses on, an important one is the lingering popularity of the black market for recreational cannabis.
Reports have shown that, despite legalization, millions of citizens in California and Canada are still choosing to buy marijuana illegally. In Canada, the numbers could be as high as 40%.
Many analysts are saying the “green rush” that began last October with Canadian legalization is over. Companies are adjusting their revenue projections, and investors are tapering their expectations.
… But Medical Cannabis Sales are Booming
Since the 2018 Farm Bill was passed in the US, low-THC, high-CBD hemp can be cultivated and sold all over the country. As CBD has a host of health and wellness properties, this has created its own promising market that has the potential to put Canada’s profits from legalization to shame.
According to a report from the Brightfield Group, the CBD market in the United States is on track to be worth $23.7 billion by 2023. This makes the health and wellness sector the most lucratively promising aspect of investing in cannabis stocks.
Perhaps the most significant catalyst for this is the fact that medicinal cannabis users tend to be a lot more reliable customers compared to recreational users.
According to the Motley Fool, medicinal users buy and consume cannabis at higher and more consistent rates, and they’re even more likely to purchase CBD derivatives such as edibles, beverages, oils, topicals, and concentrates.
Cannabis stocks belonging to companies like Charlotte’s Web Holdings Inc. (TSX:CWEB) (OTCQX:CWBHF) that retail CBD/hemp extract products stand to flourish while recreational brands continue to wither.
In late September, CWEB announced that it is going to begin selling CBD gummies in 738 stores across 45 US states. Based on the statistics quoted above, these kinds of products will capture the market in the way that recreational-focused dry flower products have not.
Then there are companies like Ovation Science Inc. (CSE:OVAT) (OTCPK:OVATF), which specifically target niche CBD wellness applications. In Ovation’s case, that means creating products for the skincare market.
Ovation’s flagship topical is currently the #1 topical cannabis product sold in Nevada dispensaries. That’s the kind of result investors should be relying on.
So, a message for investors: start thinking of cannabis stocks in terms of a medical and wellness revolution, not a recreational revolution.
All the more reason why the (SAFE) Secure And Fair Enforcement Banking Act of 2019 needs to be passed. Institutions are staying clear of the Cannabis industry until the SAFE Banking Act passes.
Blame Mom and Pop. That’s the increasingly common refrain from publicly traded cannabis companies and professional investors who have watched stock prices crater over the past several months. With large institutions still reluctant to invest in
With large institutions still reluctant to invest in pot, Canadian retail investors continue to dominate the public floats of many cannabis companies, especially those that operate in the U.S. where marijuana remains federally illegal. For example, institutions hold less than 1% of the float of Curaleaf Holdings Inc., the largest American pot company by market value, according to data compiled by
For example, institutions hold less than 1% of the float of Curaleaf Holdings Inc., the largest American pot company by market value, according to data compiled by Bloomberg. That number is also comparably small for other large U.S. players, including Green Thumb Industries Inc. at 3% and Cresco Labs Inc. at about 1%.
That gives an outsized influence to individual investors.
“The stock price is driven by Canadian retail investors, and that Canadian retail investor is a fickle, ignorant investor that doesn’t really understand what they’re investing in,” said Jeff Mascio, chief executive officer of Cannabis One Holdings Inc., a Denver-based pot company.
Cannabis One’s share price has slumped 96% from its high on April 23 to a market value of just C$17 million ($13 million). It recently laid off about 20 employees and found some other efficiencies in order to stop burning through cash, and is now focused on raising money from U.S. investors via a private placement. The company reported revenue of $2.2 million for the quarter ended July 31. Raisin
Raising Doubts
Mascio said the whole experience made him question whether listing in Canada was worthwhile.
“There was a time when I was like, ‘That was a complete and utter mistake,”’ he said. “We’re having to spend a lot of effort on the Canadian public side that’s not delivering a whole lot of results.”
To be sure, many pot companies haven’t delivered results either, suggesting retail investors unloading their pot stocks aren’t always ignorant. Most have yet to turn a profit, while the black market remains strong in key jurisdictions like Canada and California. In addition, specific cases have made investors wary of the whole sector. CannTrust Holdings Inc. had its license suspended and is the su
The dominance of retail investors has been an issue even for larger U.S. companies like New York-based Columbia Care Inc., which has lost about two-thirds of its value since April but still has a market value of over C$900 million.
“Until the larger institutional investors in the U.S. begin to look at the sector from a long-term perspective, I think you’re going to see a lot of volatility,” CEO Nicholas Vita said in an interview at the company’s office on Fifth Avenue. “I think you’re also going to see a thematic trend where people are picking baskets rather than picking companies because there’s a lack of information and a
Private Bets
The business case for investing in the burgeoning cannabis industry hasn’t changed but private companies are currently a better bet, according to Matt Hawkins, founder and managing partner of private equity firm Entourage Effect Capital LLC, formerly known as Cresco Capital Partners.
“The market’s only going to get bigger and smart investors know that,” he said. “But, unfortunately for the public companies, prices are driven by retail investors who in some cases aren’t savvy enough to be making the buy-sell decisions. They’re losing money that they maybe shouldn’t have been investing in the first place and they’re spooked.”
This means the trajectory of pot stocks could change dramatically when institutional investors begin to buy in, said Vita.
“If the U.S. investing community, particularly the U.S. institutional investing community, decides to lean in, you’re going to see a massive spike in valuations,” he said.
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