The Rise and Fall and Rise of Cannabis

The unexpected beneficiary in the pandemic: cannabis. Yes, the substance that’s still illegal in 41 states made it onto the shortlist of essential businesses allowed to stay open. In the midst of record sales, cannabis CEOs are naming the current market as “Cannabis 2.0”, the maturity and recovery of the industry.

Investors rushed into cannabis stocks in 2018 with the hopes of earning fast and easy returns. Stock prices crashed in 2019 as companies failed to meet sales growth expectations or generate a profit. These companies had poor cost controls and lacked access to traditional banking services for loans. The ETFMG Alternative Harvest ETF ($MJ), a cannabis-focused ETF, lost over half its value after hitting its peak in 2018.

(TAJ: Understanding the risks of investing in an emerging industry)

State of the industry

The cannabis industry experienced its highest number of sales in March – April 2020 but some things still stay the same. Cannabis companies are still struggling to get loans from banks and investors who are reluctant to invest in a controversial and unprofitable business. The industry needs a much-needed win. A November vote to legalize marijuana in 5 states just might be it.

Despite being legalized in 11 states in the US and in Canada, illicit marijuana purchases still represent 44% of total consumption. Consumers are choosing to buy cannabis illegally and for good reasons:

• High prices in the legal market… Average prices in the legal market are $10.30/g vs $5.73/g in the illicit market.
• Lack of retail infrastructure… Accessibility to stores remains a problem for consumers.

Not all cannabis companies are cut from the same strain

The pandemic helped cannabis stocks recover some of their 2019 losses but they are still far from their previous highs. Most companies are still burning (down), but some have been able to successfully manage their costs and thrive:

• The bright spot… Curaleaf Holdings ($CURLF), one of the largest cannabis growers in the US, is in a much stronger financial position (i.e. close to being profitable) and has outperformed most of its competitors in 2020.
• High risk… Once high-flying Aurora Cannabis ($ACB), which lost 90% of its stocks’ value since 2019, could continue to fall as it struggles to cut costs. The company may need to raise additional capital from new investors which will negatively impact stock prices.
• Avoid at all costs… MedMen ($MMEN), an infamous company in the pot industry that failed spectacularly after being sued by their employees and investors for bank fraud, stock price manipulation and other misdeeds. This sent their stock price down by over 97%.