All dreams of a continued cannabis return are fast dashing, and the sell-off is so intense that the sector’s staunch supporters wonder if the endless roller coaster is worth it.
What started off as a spectacular year for the industry, with the Horizons Marijuana Life Sciences Index rising 140 percent in early February, has crashed. The index is now back where it started the year, and many of the giants in the sector are in much worse shape.
Canopy Growth Corp. is down 41 percent this year despite backing from wine and spirits giant Constellation Brands Inc., and the combination of Aphria Inc. and Tilray Inc. has done much to support the merged company’s share price. has reduced. .
Some of the pain can be attributed to market dynamics. Growth stocks came under fire at the start of the year, and cannabis stocks tumbled, helping to preserve some of their credibility after a disastrous 2020. Fast-forward seven months and many growth stocks have since sold out, as seen in trading activity. That’s once the Almighty Arc Innovation ETF, which is now down 6 percent for the year.
Overzealous investor expectations are also playing a key role again, and hopes of federal legalization in the United States are waning, leaving investors staring at several more quarters of red ink. Although Democrats have proposed legislation for cannabis reform now that Joe Biden is in the White House, the careful plans he has presented are likely to get bogged down in the legislative process.
“We believe that the comprehensiveness of the draft plan will need to see substantial amendments to gain sufficient support for it to eventually be implemented into the law, which was projected to be a material catalyst for the sector.” Canaccord Genuity analysts Matt Bottomley and Derek Daly wrote in a recent report for clients.
There are also fears that Democrats could lose control of the US House of Representatives or Senate in 2022, which could make the proposed legislation even more difficult to pass.
America is not the only wasteland for cannabis companies. In fact, some US multistate operators — which actually operate within individual states but don’t allow their operations to cross state lines because of federal regulations — are encouraging sales growth. Trulieve Cannabis Corp., which trades on the Canadian Securities Exchange but operates primarily in Florida, is one of the region’s profitable companies, making it a rarity.
Because so many multistate operators already exist, it will be difficult for Canadian-bred companies to compete, even if federal regulations eventually change. Given this reality, the domestic operations of these companies are heavily weighted when investors assess their prospects – and the situation in Canada is not very good.
Analysts at Canaccord wrote to clients, “We believe that the ability to maintain/grow market share in Canada will become increasingly difficult…
The situation is so dire that CIBC World Markets analyst John Zamparo recently said that the ever-venerable Canopy and Aurora Cannabis are likely to bleed red ink for another year, even though both companies kept their old management. Booted up teams and spent many years cleaning up the old one. Guard error. “We continue to expect at least 12 months until we receive positive earnings before interest, taxes, depreciation and amortization,” Mr. Zamparo wrote in a recent note to clients.
As many Canadian manufacturers struggle in an oversaturated market, Tilray CEO Irwin Simon speculated last week that the industry could see some consolidation. “Canadian cannabis stocks have gotten pretty cheap lately. There’s a point being there to make some other acquisitions and companies out there to get shares, to spend a lot of money out there and create awareness with consumers. Instead of acquiring shares for Rs.
If history is any guide, it cannot be enough. CanniMed Therapeutics Inc. and MedReleaf Corp. Aurora’s 2018 deals for Cannabis companies have been merging for years, and so far nothing has changed.
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