Why are Canadian pot stocks crashing despite the massive gains in cannabis-centric legislations in the Great White North? Barely four months ago, cannabis 2.0 welcomed with pomp and color: this was to signal the beginning of great things for the industry.
Cannabis investors expected huge gains in Canadian pot stocks now that marijuana concentrates and edibles were finally available for sale. A report from the Bright field Group indicated that the Canadian marijuana market would balloon to $ 3.7 billion in 2020. Out of this, cannabis 2.0 was expected to bring in $ 900 million through the sale of cannabis concentrates, edibles and vapes.
Why Are Marijuana Stocks Plummeting?
Quarter one of 2020 is almost out but still, there are no positive indications of growth in the Canadian marijuana market. Here are three factors that could be contributing to this downward spiral. If they can be resolved early enough the close of 2020 might surprise us with a good turn of events.
1. Issues at Canntrust
In July last year, one of the largest Cannabis companies CannTrust (NYSE:CTST) got caught up in an illegal growing scandal that saw their share prices drop from about $9 to slightly below $1. This scandal raised concerns in the industry as investors wondered which other pot companies could be involved in similar malpractices.
HEXO (NYSE:HEXO) was the next suspect in line. However, no evidence was produced to this effect.
It’s almost a year since the CANN Trust scandal happened but the industry is still reeling from the bad publicity effects. Health Canada is yet to give its final verdict on the issue. Hopefully, this will be concluded before the year ends and CannTrust can turn over a new leaf.
If no other pot company is found in a similar scandal the industry may be able to recover from this damage in due time. Meanwhile, investors are keeping a close eye on how things will turn out in the long run.
2. Marijuana companies are low on capital
Cashflow problems have plagued the marijuana industry from its inception. For starters, it’s hard for marijuana businesses to access traditional forms of funding such as bank loans. Not many financial institutions are ready to deal with marijuana accounts because of the red-tape and due-diligence measures that are involved. This means that pot companies have to look for alternative forms of financing.
As it is a number of these companies are edging closer to bankruptcy by the day. Mergers and acquisitions are also becoming the norm. This is being fuelled by the declining value of small marijuana businesses which are subsequently being absorbed into larger marijuana businesses. With limited cash, marijuana companies may be unable to sustain their operations and hence are being forced to sell out.
Just recently Tilray (NASDAQ: TLRY) offered to acquire marijuana retailer 420 Investments for 110 million Canadian dollars. This, however, did not work out and Tilray rescinded on their offer. As it is, Tilray is having a court case to answer to the same.
With limited capital at hand, it will be difficult for marijuana companies to remain afloat amidst the tough economic situation. Subsequently, smaller pot companies may be forced to close shop or be acquired by larger ones. Mergers and acquisitions may remain the norm until financial stability is re-established in the industry.
3. Advertising challenges for cannabis 2.0
Cannabis advertising is very much limited in Canada. All marijuana products must be packed in packages that do not appeal to children while health risks associated with marijuana use must be clearly indicated. As much as this may not affect the sale of marijuana flowers, things become tricky with fancier products such as vapes and edibles.
In the US things are a bit different as restrictions on marijuana packaging are not as severe. It will be interesting to see if sales will be affected by the limited advertising opportunities for marijuana edibles and concentrates.
The other issue with cannabis 2.0 is the cap placed on tetrahydrocannabinol (THC) which is 10mg per serving. It is highly likely that this will fuel the black market which offers better concentrations of THC.
Cannabis 2.0 holds a lot of promise for the Canadian marijuana market. However, these challenges may contribute to underwhelming sales in 2020. If this happens it will be a great bummer for marijuana bulls who were expecting to reap heavily from cannabis 2.0.
Will Things Eventually Turn For The Better?
When you take a broader perspective of the global marijuana industry there are all indications that the market may regain vibrancy. For now, investors need to adopt a “wait-to-see” approach before jumping in for a buy.
This article summarizes some of the reasons why Canadian pot stocks are crashing. Let us know if you have similar or divergent opinions on the same.
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