Is the cannabis sector ready for a rebound?

It all started out so well… 

2021 began with renewed hopes of legislative movement in the United States as a newly elected Democrat took the reins, while up here in Canada it seemed like the initial jitters of the cannabis space might be over now that markets were firmly established and places like Ontario were finally opening enough shops to fit the demand.

But that’s the way she goes, as they say. After about a month and a half of upswing in the sector to start the year, it all took a turn for the worse, with cannabis having been truly kicked in the teeth over the past half-year. Granted, there are a few bright spots where stocks haven’t suffered too terribly but for a supposedly maturing sector whose names would, the theory goes, begin to be differentiated based on merit, we are still left with most stocks dropping en masse, losing almost all of their lustre and causing shareholders to wonder when it’ll all end. 

Is cannabis due for a return? Probably. Will it happen? That’s not so sure.

Up in the soon-to-be frozen again North, the signs are that cannabis, although a multi-billion market when you put medical and adult-use together, has still too many players even for its eventual size, speculated to be in the $5 to $7 billion range. 

One only has to look at the numbers of the supposed kingpins of the industry, names like Canopy Growth, Cronos, Tilray and Aurora Cannabis, to see things aren’t unfolding as planned. 

Edmonton-based Aurora (Aurora Cannabis Stock Quote, Charts, News, Analysts, Financials TSX:ACB) dropped its fiscal fourth quarter earnings this week, showing an incredible 45 per cent year-over-year fall in consumer sales, with net revenue down to $19.5 million compared to $35.3 million a year ago. 

The company pinned the decrease on the pandemic and a supposed drop in consumer demand, but the negative impact on cannabis from COVID isn’t so easy to determine, especially since sales were shown to go through the roof last year during lockdowns. Also, by the look of sales at the Ontario Cannabis Store they’ve been mostly trending upwards on a monthly basis for years, with the high point of $103.35 million reached in March of 2021.

“We’ve shown an incredible agility over the last two years and the final leg of our transformation is well underway,” said Aurora CEO Miguel Martin in the quarterly conference call on Monday.

Yet, ACB managed a net loss of $135.1 million for the quarter, far less than last year’s rosy $1.86 billion loss but still enough to likely worry investors. Aurora also announced shuttering one of its operations in home-town Edmonton, with eight per cent of its workforce to be affected. 

But the Canadian scene will continue to evolve, with one of the more interesting nuances being the emergence of craft and premium weed growers as a true force. Earlier this year, cannabis bellwether Canopy Growth (Canopy Growth Stock Quote, Charts, News, Analysts, Financials TSX:WEED) announced the $435 million acquisition of premium licensed producer Supreme Cannabis, with Canopy saying the addition of Supreme’s high-quality brands would round out its portfolio. 

Meanwhile, smaller boutique companies like Indiva (Indiva Stock Quote, Chart, News, Analysts, Financials TSXV:NDVA) are making the bigger guys eat their proverbial lunch. $54 million market cap Indiva licenses well-known American brands in cannabis gummies and chocolates and currently has a huge 45 per cent of the Canadian edibles market.

And while consolidation in the sector has forever been the call, it’s seemingly needed more now than ever, as the number of players big and small remain fighting over what seems to be a limited consumer market.

Alternatively, investors had been enjoying a good run by turning to US cannabis stocks which were on fire last year as more and more individual states opened their doors to either medical marijuana or that plus rec cannabis. The overall landscape includes a number of so-called multi-state operators who have their hands in many pies, while there are still some one-state companies drilling down into expanding markets within the one jurisdiction. 

Big names like Curaleaf, Trulieve and Green Thumb Industries made hay last year and in early 2021 but they’re now down by a lot and in some cases cut in half from their earlier highs.

Part of the problem in the US is a concern that movement on the federal front now seems further away than imagined in the first few months of the Biden administration. 

As a first step, the Democrats drafted the SAFE Banking Act to allow banks to work with cannabis companies without falling afoul of federal regulations which at this point still have marijuana as a Schedule 1 drug, the thought being that once banks and their capital are made available to the cannabis companies, investment in the industry would blossom in wait of movement on federal legalization. 

But that path may be tougher than initially thought. Senate Majority Leader Chuck Schumer, who earlier this year said getting the required votes to end the federal ban on cannabis would be very difficult, has said that he and Senate colleagues have decided to block the SAFE banking reform bill up until cannabis legalization itself becomes a reality, effectively putting an end to the idea of first taking the smaller step embodied by the SAFE act.

So, until there’s more movement on the federal level in the US and until the Canadian LPs get their act together, it may be a long wait for cannabis’ return.