The cannabis industry has gone through a rough period lately. After building extremely high expectations in 2018 with the legalization of recreational marijuana in Canada, marijuana stocks suffered significant losses in 2019. Just when it looked as though 2020 might be a better year for the cannabis industry, disruptions related to the coronavirus outbreak added new challenges…
In light of the broader stock market’s declines, it’s easy to see the poor performance of cannabis stocks so far this year as simply reflecting the poor overall environment. There’s something, though, that throws cold water on that theory. Many of the year’s worst performers turned things around to produce the best gains in Tuesday’s massive market bounce, but many of the biggest cannabis cultivators in the industry failed even to keep up with broader stock indexes, let alone lead the entire market higher. That’s the latest sign that marijuana investors just seem to be giving up on the industry as a place to make money.
What goes down should go up
When you look at Tuesday’s market action, you’ll notice a lot of the industries that got hit the hardest in the coronavirus market crash were among the big leaders. Airlines, for instance, saw double-digit percentage gains, with the weaker players in the industry generally showing some of the biggest advances. Similarly, cruise ship operators, homebuilders, and related industries like aircraft parts and components suppliers all saw extremely encouraging bounces from their recent lows.
Cannabis stocks didn’t show that kind of reaction at all. Tilray (NASDAQ:TLRY), which has lost more than three-quarters of its value so far this year, only managed a 4% advance. Cronos Group (NASDAQ:CRON) did slightly better, rising 7%, but it’s still down almost 30% on the year. Gains of 5% for Aurora Cannabis (NYSE:ACB) still left its stock well below the $1 per share level on the New York Stock Exchange and off by two-third year to date. Even Canopy Growth (NYSE:CGC), which is down almost 40% so far in 2020, only managed to claw back about 4% today.
Should investors be more bullish?
Many of the same arguments favoring cannabis companies still exist despite the big drops in their share prices over the past year. The Canadian market remains full of promise, as cultivators haven’t been able to increase their distribution as much as originally hoped because of a lack of retail locations in key parts of the country, especially Ontario. Moreover, Canada is moving forward with newer, value-added cannabis products that go well beyond simple marijuana flower and can fetch premium prices. Similarly, the opening of legal hemp in the U.S. market has provided opportunities for Canadian cannabis companies to move south — and that could prepare them for a broader legalization if it comes in the future.
Also, the drop in cannabis stock prices has made them more affordable and attractive. Even though profitability has still eluded many marijuana companies, revenue levels have risen enough to justify current valuations in some investors’ eyes.