We saw a flurry of earnings reports from leading cannabis companies this week and unfortunately the results fell short of expectations.
That drove shares and the entire sector lower – hitting a new 52-week low.
The cannabis stock fund Alternative Harvest (MJ) fell 17% on the week and is now down 39% on the year.
This has been one of the weakest stretches cannabis stocks have ever seen – the fund is down in eight of the last nine months. Take a look at the stunning collapse is prices below. Each bar represents one month of time.
This sharp decline has been driven by three factors.
Canada off to a slow start: The Canadian legal cannabis market is off to a slow start. The reason? Over regulation and high taxes are making it very difficult for the legal market to compete with the illegal market. Industry sales are about half what analysts expected.
California struggling: California’s legal market is also off to a slow start. The problem here? Over regulation and high taxes is making it difficult for legal business to compete with the illegal market. Again, legal sales are falling short of expectations.
Vaping crisis: Illegal vapes have led to 30 people dying and more than 1,000 getting sick. This had a crushing effect on cannabis stocks.
Despite these Challenges I’m Still Optimistic
There’s no question this has been a brutal stretch for cannabis stocks and the cannabis industry. However, I’m still super optimistic. The issues that the cannabis industry is struggling right now are short-term and they are all fixable.
This volatility is actually pretty normal for new, high-growth industries. Cannabis just went legal in Canada in California in 2018. It’s going to take a few years for these young companies to learn the ropes and for the industry to mature.
I expect regulations to relax that will let the industry thrive.
I also expect taxes to fall in line with the broader economy and other industries.
It’s going to take some time for regulations to ease up so the industry can thrive – but I still 100% think the industry will be huge, and these young cannabis companies will be very successful.
How do I Position my Portfolio to Benefit from a Potential Rebound?
Big picture – I am looking to add shares of US cannabis stocks and lighten up on Canadian shares.
I see the most potential in US cannabis stocks right now.
Outside of California, the US legal cannabis industry is thriving. With more states going legal that trend should accelerate in 2020.
And looking forward, cannabis is still illegal on the federal level. At some point I expect that to change, within the next few years. That would be an enormous catalysts for US cannabis stocks.
In the US I like large, multi-state operators such as:
- Trulieve Cannabis Corp (TCNNF)
- Cresco Labs (CRLBF)
- Curaleaf Holdings (CURLF)
- Charlotte’s Web (CWBHF)
In Canada, Canopy Growth Corp (CGC) looks like the best because of the $4 billion investment it landed from Constellation Brands (STZ).
I also like Aurora Cannabis (ACB) and Organigram Holdings (OGI).
Beyond these big names, I am expecting to see a flurry of bankruptcies in the Canadian cannabis market in the next 12-24 months – I expect to see small and medium sized businesses struggle with serious cash shortages.
If that happens, it would be good for the big boys like Canopy who have the cash to withstand industry weakness. When the small and medium sized players are gone Canopy should step in and take market share.
The Big Picture on this Bear Market
It’s been a brutal stretch for cannabis stocks. However I am still optimistic.
In the short run the sector is the most oversold it’s ever been. I am expecting to see a huge relief rally literally any day now.
Longer term the outlook has never looked better.
My advice is to sit tight and stay patient. Focus on the long-term opportunity. I still see a huge industry ahead and major opportunity.
Disclaimer: This report is for entertainment purposes only. Every investor should consult with an investment advisor before making investment decisions. The Vodicka Group, Inc. is not a broker/dealer. We do not receive compensation for mentioning stocks. At various times, the clients, publishers and employees of Vodicka Group, Inc., may buy or sell the securities discussed for purposes of investment or trading. Michael Vodicka owns shares of Canopy Growth Corp (WEED), Aurora Cannabis (ACB), Organigram Holdings (OGI), Cresco Labs (CRLBF), Charlotte’s Web (CWBHF) and Trulieve (TCNNF).