Is Now the Right Time to Invest in Cannabis Stocks?
Is Now the Right Time to Invest in Cannabis Stocks?
In 1936, the cult classic propaganda film Reefer Madness hit the global markets. The 1-hour film portrayed a terrifying life for anyone who ever touched cannabis, the Devil Weed! For the next 60 years, the stigma stuck, and the criminalization for possession or use deterred anyone from starting a legitimate business in the industry. As countries around the world study and research potential benefits of cannabis and marijuana products, the cultural perception has begun to change.
In 1996, California became the first state to legalize medicinal marijuana, and many more followed, bringing the current number of states with legal medicinal marijuana use up to 24, nearly half of the US states. Sixteen years after California legalized it for medicinal use, Colorado and Washington legalized it for recreational use in 2012. At present, there are only 10 states where recreational use is legal. While it is still largely illegal, the societal perception of the drug is starting to change. As momentum builds, it is becoming a topic in the halls of Congress, where the idea of federal legalization of cannabis is starting to take shape. Many believe we may see federal legalization of cannabis as early as 2024. If this happens, many expect a boom in cannabis stocks.
With all the excitement and potential opportunity, institutional and retail investors began pouring money into any cannabis stocks they could get their hands on. This caused massive spikes in share prices. Then something happened.
Starting in January of 2021, prices began to slide across the board. While a pullback in price is natural and expected, this pullback hasn’t stopped for over 2 years. The Alternative Harvest ETF (MJ) has fallen 91% since 2021, one of the best-looking downtrends you will ever see.
Why the colossal drop in price?
One predictable characteristic of a mania is that everyone rushes to make money off of it. The past few years have seen thousands of legal and illegal marijuana growing operations around the world. All trying to grow as much as possible and get rich. Unfortunately, the laws of supply and demand have punched them square in the face. According to the Department of Justice, a pound of marijuana back in 2000 could bring in as much as $6,000. However, with all the new growers, supply far exceeded demand and now there is an over abundance of pot! Growers are only getting $1,000 a pound for their goods. For many, that is not enough to cover the cost of cultivation. Because of this, we are seeing companies struggle significantly.
Canada legalized both recreational and medicinal cannabis back in 2018, the second country in the world to do so after Uruguay. Even with the open regulation, all of the publicly traded companies are struggling.
Aurora Cannabis Inc. (ACB) has had 11 consecutive quarters of negative earnings. In 2020 the company underwent a 1/12 reverse split in order to avoid delisting. Their adjusted peak price was just over $150 per share, today it’s trading at $0.51. A 99.65% drop that has investors feeling sick.
Canopy Growth Corporation (CGC) has shared an eerily similar fate. A share price in 2021 over $56 has eroded to just $0.82 as of Friday’s trading session. A shocking 98.5% slide.
Is now the time to buy?
With this type of supply glut, there is typically a bottoming out period where producers shut their doors, or we see consolidation in the industry to increase economies of scale. If we’re not there yet, we’re close! I live by the mantra “The trend is your friend until the bend at the end”. This should be the mission statement for all trend traders. Looking at these charts, I simply cannot buy into the downtrend yet. There has not been a “Bend at the end”. Trying to time the cannabis industry bottom could be a painful proposition, that does not personally make sense to me and my risk tolerance. For now, it is a waiting game. Wait for the market to prove to you that the downtrend is over, and things may be turning. New highs will have to be made for me to buy in (no pun intended). When the turn does come, I will not be buying individual stocks, just too risky. Instead, I will be looking to buy the major liquid ETFs for the cannabis industry like Alternative Harvest ETF (MJ) or Advisorshares Pure US Cannabis ETF (MSOS).
The cannabis industry has witnessed a significant shift in societal perception and legislative changes over the years. The potential for federal legalization of cannabis is on the horizon, which has sparked excitement and investment in cannabis stocks. This leads me to believe there is significant profit potential down the road. The prudent thing to do now is wait for the market to stabilize itself and consolidate. When that day comes, the price charts will start to reverse the current landslide in share prices. Be patient and have a plan in place for the upcoming turn.
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On the date of publication, Merlin Rothfeld did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.