The bears are feasting on marijuana stocks these days, with both Canadian and American companies losing ground almost daily as the fledgling industry still tries to find its feet.
Rocked by regulatory snafus and investor impatience over profitability, the ongoing slump could drag on longer. Pair that up with what seems to be the tail end of an economic cycle and there could be more downside in store for cannabis.
“Anytime you’re investing in an area that has such potentially massive growth opportunities, you’re going to have a significant amount of volatility in your portfolio. That being said, if you want massive growth opportunities in your portfolio, you have to tolerate that,” says Mike Philbrick, president at ReSolve Asset Management, who spoke to BNN Bloomberg on Thursday.
“So you want to wait for good, stiff corrections and accumulate a position over time. I would suggest that there’s more pain [to come] in all risk assets and [the cannabis stocks] will get caught up in that, but that’s not a certainty,” he said.
The marijuana stocks have had a good start to September, with names like Canopy Growth (Canopy Growth Stock Quote, Chart, News TSX:WEED), Aurora Cannabis (Aurora Cannabis stock Quote, Chart, News TSX:ACB) and Tilray (Tilray Stock Quote, Chart, News NASDAQ:TLRY) all finishing Friday up for the week. It’s been a sorry tale for much of the past six months for cannabis, however. The Horizons Marijuana Life Sciences ETF, which attempts to track the North American Marijuana Index, has lost 36 per cent of its value since hitting a 2019 high of $23.87 in March.
But while there have always been question marks surrounding the industry, the concerns seem to have ramped up in recent months in relation to a number of notable events. Sector leader and on-again off-again king of marijuana stocks Canopy Growth, for one, fired its CEO, ostensibly because part-owner and alcohol giant Constellation Brands was unimpressed with the lengthy roadmap to profitability being charted out. Then came the debacle of CannTrust Holdings, once considered a paragon of professionalism in the space but now found to have attempted to skirt Health Canada regulations at its grow sites.
The gloom has pulled down target prices for a number of analysts who see longer lead-ups in store for cannabis companies, especially in Canada where the rollout of legal weed has been slow and cumbersome.
This week, Wall Street analyst Vivien Azer dropped her 12-month target for Tilray from US$150 to US$60, saying the market in Canada remains underdeveloped.
The Canadian cannabis landscape “has been challenging over the last few months, as too few stores, supply shortages and a lack of novel products have hampered category development,” Azer wrote in a note published Tuesday, according to Bloomberg News. “We would argue that TLRY has been the most impacted by weak industry supply as its asset-light model was initially overly reliant on third-party supply.”
But Philbrick believes that for investors willing to take the risk, buying cannabis stocks in small doses could turn out positively.
“If you take the approach of, ‘I’m going to buy a little, and then a little bit more when we have significant corrections,’ it’s probably an interesting way to play this,” says Philbrick.
“I would also look at the marijuana ETF that Horizons offers, the US version. It’s a different approach, as the US market is going to be much more CBD-dominated market. There are some opportunities to move into CBD distribution through Kroger grocery, for example, so you have this massive market —20 to 30 times the size of the Canadian market. So you might want to consider diversifying and buying a little of each,” he said.