When Will Cannabis Stocks Find Their Bottom?
March 7th, 2018
When will they find their bottom? That’s a question that both institutional and retail investors are likely asking themselves after cannabis-based stocks on all the global stock markets have taken a nose-dive in recent times.
According to Bloomberg News, this past Friday marked the tell-tale signs that retail investors were “panic selling” as Canopy Growth (parent company of Tweed Inc) tumbled down to just $25 after reaching highs above $40 just as 2017 was coming to a close – a loss of approximately 40 percent. And while Canopy is the bulwark that investors often look to determine the health of cannabis stocks, it wasn’t alone: Aphria fell 14 percent while Aurora dropped 14 percent.
“People are panicking because they are losing their money,” Chris Damas, editor of the BCMI Cannabis Report, told Bloomberg Markets through email. “Stocks are in bear market territory.”
Just last month things were looking on the up and up for the industry. After a contentious hostile turnover attempt, Aurora eventually gave Cannimed an offer they couldn’t refuse, and the two sides have negotiated a takeover on friendly terms. That seemed to put the market in good spirits.
But then the bad news started to flow. Jeff Sessions rescinded the Cole Memo that allowed many state-licensed operators across the United States to avoid prosecution if they followed some golden rules that included that they do not sell cannabis to minors. Rescinding the Cole Memo provided a great deal of uncertainty to the markets – because it’s anyone’s guess as to whether prosecutors across the United States will actually go after operations that are legal for medical and recreational purposes in dozens of states.
Then, more bad news. Right-leaning members of Canada’s Senate wanted more time to debate the country’s plan to legalize the drug, while progressive, Liberal-leaning senators wanted to push ahead with approving the legalization plan so that the government could meet its self-imposed July 2018 deadline. On February 15, the Senate came to a compromise: Instead of delaying review of the bill for months on end, the final vote on the Cannabis Act (Bill C-45) would be June 7th 2018.
At the time, Senator Tony Dean tried to spin it as a positive, tweeting that “I thought it could be done by May, some conservatives argued for The Fall. The beauty of a consensual agreement is that everyone gets to declare victory.”
The markets, however, reacted more negatively to the news.
When looking at fundamentals – irrespective of any of the bad news – some analysts caution that they believe that the entire cannabis sector is massively overvalued at the moment. Traditional metrics, such as earnings and revenue, are only marginally considered, as new metrics come in. These days, cannabis companies are often valued based on the planned and approved amount of square-feet of cultivation space, regardless of the company’s history of getting the hard work done. Another metric is the amount (typically in kilograms) of cannabis that each company is authorized to grow.
Its important to note that at its current market cap, Canopy Growth is currently valued at more than 50 times its revenue, which is higher than industry competitors and also much higher than stocks in other sectors, such as mining, gold, and consumer technology.
According to the Motley Fool, there are five hidden risks with investing in pot stocks. Sean Williams, author at Motley Fool, cautions first about the political risks that we mentioned earlier. He too notes the Cole memo rescinded on January 4 2018 as a potential market mover. Second, Wiliams points to oversupply. We don’t know how much cannabis Canadians will consume when the drug becomes legal – estimates have ranged that could cost companies to lose out on billions of dollars in revenue depending on which estimates come to be true. Williams points to the 3.7 million square feet of space that Canopy Growth is growing as a potential indicator of potential oversupply.
Shareholder dilution is another problem. Because cannabis companies do not have access to typical financing from banks, these companies have to rely on financing methods that give out large tranches of stock. This is particularly the case with stocks that operate in the United States – as banks are just starting to jump on the cannabis investing bandwagon.
Williams also points to two more problems with pot stocks: investor emotions, and inexperienced management. Because much of the money flowing into pot stocks comes from retail investors, the “panic selling” we talked about earlier could lead to dramatic drops in pot stock prices. Add to that the inexperienced management personnel that does not have the typical experience in capital markets, and viola – you have a disaster waiting to happen.
Where will the bottom be? We may not know for months – since cannabis companies are valued at multiples much, much higher than in other capital market sectors, and the industry is fraught with the specific concerns highlighted in this piece, the bottom may be yet to be found.
The upshot is that the industry continues to experience tremendous growth around the world. These valuations could come down as revenue and profits begin to materialize, and these stocks could still be a good value at their current levels. This is particularly true if Canada becomes a global leader in the burgeoning cannabis industry.
Follow Us on Social Media
About CFN Media
CFN Media (CannabisFN) is the leading creative agency and media network dedicated to legal cannabis. We help marijuana businesses attract investors, customers (B2B, B2C), capital, and media visibility. Private and public marijuana companies and brands in the US and Canada rely on CFN Media to grow and succeed.
CFN launched in June of 2013 to initially serve the growing universe of publicly traded marijuana companies across North America. Today, CFN Media is also the digital media choice for the emerging brands in the space.
Disclaimer: Matters discussed on this website contain forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from any future results, performance or achievements expressed or implied by such statements. Emerging Growth LLC dba TDM Financial, which owns CannabisFN, is not registered with any financial or securities regulatory authority and does not provide nor claims to provide investment advice or recommendations to readers of this release. Emerging Growth LLC dba TDM Financial, which owns CannabisFN, may from time-to-time have a position in the securities mentioned herein and will increase or decrease such positions without notice. The Information contains forward-looking statements, i.e. statements or discussions that constitute predictions, expectations, beliefs, plans, estimates, or projections as indicated by such words as "expects", "will", "anticipates", and "estimates"; therefore, you should proceed with extreme caution in relying upon such statements and conduct a full investigation of the Information and the Profiled Issuer as well as any such forward-looking statements. Any forward looking statements we make in the Information are limited to the time period in which they are made, and we do not undertake to update forward looking statements that may change at any time; The Information is presented only as a brief "snapshot" of the Profiled Issuer and should only be used, at most, and if at all, as a starting point for you to conduct a thorough investigation of the Profiled Issuer and its securities and to consult your financial, legal or other adviser(s) and avail yourself of the filings and information that may be accessed at www.sec.gov, www.pinksheets.com, www.otcmarkets.com or other electronic sources, including: (a) reviewing SEC periodic reports (Forms 10-Q and 10-K), reports of material events (Form 8-K), insider reports (Forms 3, 4, 5 and Schedule 13D); (b) reviewing Information and Disclosure Statements and unaudited financial reports filed with the Pink Sheets or www.otcmarkets.com; (c) obtaining and reviewing publicly available information contained in commonlyknown search engines such as Google; and (d) consulting investment guides at www.sec.gov and www.finra.com. You should always be cognizant that the Profiled Issuers may not be current in their reporting obligations with the SEC and OTCMarkets and/or have negative signs at www.otcmarkets.com (See section below titled "Risks Related to the Profiled Issuers, which provides additional information pertaining thereto). For making specific investment decisions, readers should seek their own advice and that of their own professional advisers. Emerging Growth LLC dba TDM Financial, which owns CannabisFN, may be compensated for its Services in the form of cash-based and/or equity-based compensation in the companies it writes about, or a combination of the two. For full disclosure, please visit: http://www.cannabisfn.com/legal-disclaimer/. A short time after we acquire the securities of the foregoing company, we may publish the (favorable) information about the issuer referenced above advising others, including you, to purchase; and while doing so, we may sell the securities we acquired. In addition, a third-party shareholder compensating us may sell his or her shares of the issuer while we are publishing favorable information about the issuer. Except for the historical information presented herein, matters discussed in this article contain forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from any future results, performance or achievements expressed or implied by such statements. Emerging Growth LLC dba TDM Financial, which owns CannabisFN, is not registered with any financial or securities regulatory authority, and does not provide nor claims to provide investment advice or recommendations to readers of this release. Emerging Growth LLC dba TDM Financial, which owns CannabisFN, may from time to time have a position in the securities mentioned herein and will increase or decrease such positions without notice. For making specific investment decisions, readers should seek their own advice and that of their own professional advisers. Emerging Growth LLC dba TDM Financial, which owns CannabisFN, may be compensated for its Services in the form of cash-based and/or equity- based compensation in the companies it writes about, or a combination of the two. For full disclosure please visit: http://www.cannabisfn.com/legal-disclaimer/.