Why You Shouldn’t Give Up on Cannabis Stocks like Aurora, Canopy or Tilray
The excitement over the interest that tobacco and alcohol giants entertained toward the emerging cannabis sector should have been tempered by a better grasp of the, still evolving, legal framework. The best and the worst that can be said about the cannabis sector is that it’s too early to determine the kind of performance they might generate. In the early 1980’s, few could have predicted just how far companies like Apple Inc. and Microsoft would go; and many questioned the point of personal home computers. Certainly, developments such as legalization at the Federal level in the United States and the legalization of cannabis derivatives and edibles in Canada will have significant, and mostly bullish, effects on the cannabis demand and on cannabis stocks. Still, as in any new industry, the number of players able to raise money will dry up, leaving a much smaller group of survivors in place.
Many of the newcomers, which managed to raise enough capital after their IPO’s, will be weeded out in the next year, given the declining financial appeal of cannabis stocks. But, the industry will not disappear. The patient and careful investors, who understood that cannabis companies were going to experience a slow, and even tumultuous, debut – given the evolving regulation and political hesitation – will eventually extract rewards. The one key lesson is that investors should become familiar with the legal and regulatory framework affecting cannabis in key markets and the United States in particular. Such investors will be aware that cannabis remains illegal and classified as a Schedule I drug under the Federal ‘Controlled Substances Act ‘in the United States. The key catalyst for cannabis stocks will be the removal of cannabis from Schedule I. And, this is inevitable as more and more States will vote to legalize cannabis; and as more candidates for the 2020 Presidential Election may also use cannabis legalization for campaign leverage.
Meanwhile, both regulations and cannabis share prices shall remain a mess
In Uruguay, Canada, and many US states cannabis is legal, and many companies have taken advantage of this status to launch new businesses. Most of these are publicly traded, and almost all have seen their stock prices falling over the past few months. One of the possible causes, or triggers, of what appears to be an indifference (or even diffidence) on the part of investors toward the cannabis sector is vaping. More specifically, cannabis companies are under pressure because of a U.S. federal offensive against the practice of vaping. The practice of vaping, and the industry related to it, has come under intense pressure lately as U.S. federal and state authorities have targeted vaping, e-cigarettes and tetrahydrocannabinol (aka: THC), one of the key ingredients in cannabis; most notably, THC is the main psychoactive ingredient in cannabis. Tilray Inc. stock (NASDAQ:TLRY), one of the stars of Wall Street in the fall of 2018, when it more than tripled in value in a matter of weeks, has sunk back to a price not seen since July-August 2018. Its competitors, Aurora Cannabis (TSX:ACB) has sunk back to its fall 2017 levels and Cronos Group Inc. (TSX:CRON) is trading at a value lower than its IPO debut in February 2018.
In fairness, it’s not clear what has caused the peculiar respiratory illness that has affected over 1,000 people, and killed 18, and that U.S. medical officials have linked to vaping. It may well be that the practice of vaping itself, regardless of ingredient is the problem. But the damage is done. Investors tend to become anxious faster than other categories of citizens. And the vaping restrictions have spooked them into pulling away. Yet, the vaping issue is hardly the sole factor contributing to the collapse of cannabis stocks; the avalanche started even before the start of 2019 as investors – as impatient as they are anxious – were disappointed with cannabis companies’ growth. And that perception has persisted – even if companies such as Aurora have reported significantly higher revenues year to date. The problem, rather, is that investors were too confident and too greedy. Their growth expectations were naïve, considering that the legalization process was incomplete, given the restrictions on cannabis edibles and derivatives: perhaps, the key earnings drivers for the industry.
©2019 Midas Letter. All Rights Reserved.
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