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Cannabis Stocks Dropped in 2018, But Investors Hope for Rebound

Cannabis Stocks Dip 2018 Marijuana Investing Cannabis Now

Economics

Cannabis Stocks Dropped in 2018, But Investors Hope for Rebound

As the year ends, there is a sense of disappointment over the performance of cannabis stocks, in the wake of exuberant optimism at the prospect of Canadian legalization just a few months ago.

From the “tulip mania” in 15th century Holland to the Bitcoin bubble of 2017, high hopes for a commodity’s market performance can lead to unsustainable overvaluation inevitably followed by a painful correction. Many observers believe that cannabis fell prey to this phenomenon in 2018 — but are hoping for growth in a more rational and realistic market in the coming year.

Back in March, ArcView Group, the Bay Area cannabis industry research firm, released a new study with the sanguine title of “The Road Map to a $57 Billion Worldwide Market.” Although it warned that continued legal and bureaucratic restrictions are bottlenecking the market, it assumed that these impediments constituted the only significant obstacle to growth.

Looking back on how cannabis stocks actually performed this year, some observers see other factors distorting the market. In the unsubtle language of Motley Fool investment website, “marijuana stocks put up an absolute stink bomb in 2018.”

Shortages Burst Cannabis Bubble

By way of example, Motley Fool notes the recent performance of the Horizons Marijuana Life Sciences ETF, or exchange-traded fund. As of last weekend, it was down 45 percent year to date, and has lost more than three-quarters of its initially very impressive gains since being launched in the spring of 2017.

Many factors appear to have inhibited the growth of cannabis stocks in 2018. One of those factors includes the cannabis shortage in Canada. Canada’s licensed producers have been struggling to meet consumer demand since cannabis officially went legal in the Great White North in mid-October.

For example, Aurora Cannabis, the Alberta-based licensed producer, has been raising up great expectations, especially after they acquired Uruguay’s ICC Labs, which has ambitions to export cannabis oil throughout Latin America and beyond. It is estimated that the combined capacity of the companies could hit 700,000 kilograms in peak annual output. However, Motley Fool says the company’s latest quarterly filing showed it was only producing about 10 percent of this amount.

A second factor impacting cannabis stocks in 2018 is that the competition of the legal market has made it more challenging for companies to deliver earnings. Counterintuitively, seven of Canada’s leading licensed producers — Aurora, Canopy GrowthAphriaTilrayThe Green Organic DutchmanAuxly Cannabis and Cronos Group — together actually lost nearly $300 million in their most recent quarter. The culprit seems to be unrealistic expectations that inflated the value of these companies before legalization actually took effect.

MarketWatch also notes that Canadian retail cannabis sales have been hampered by supply shortages — leading to some absurdities. For instance in Ontario, the only method of legal purchase was an online store that launched in the middle of a postal strike. Alberta has suspended licensing of brick-and-mortar retail outlets because the province has only received 20 percent of the cannabis it had ordered since Oct. 17.

The Tentative Good News for Investors

But there still are reasons for investors to be optimistic about cannabis stocks moving into 2019. For example, back in June, Tilray of British Columbia became the first Canadian-based cannabis stock to go the initial public offering route on a major U.S. exchange, the NASDAQ. Since Ontario’s Cronos broke the barrier by listing on the NASDAQ in February, nearly a half-dozen cannabis companies have uplisted from over-the-counter trading to the NASDAQ or New York Stock Exchange.

Investors Business Daily notes that when Ohio-based Green Growth Brands this week announced its plan to launch a hostile takeover bid for Ontario’s Aphria, shares jumped not only for Aphria but for most other cannabis stocks as well.

Investorplace recalls the similar rally after the infusion of a massive $4 billion investment into Ontario-based Canopy Growth from beer and beverage giant Constellation Brands in August. “That was when marijuana stocks took off like a rocket ship.” But the subsequent slump is also noted: “just as 2018 was the year of the cannabis craze, it was also the year of marijuana stock volatility.”

However, Investorplace actually sees a reason for optimism in the slump itself, which was a needed adjustment: “It increasingly looks like the pot stock bubble has already popped, and we are now in the post-pop phase. This inherently implies more stability going forward.”

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