As the first week of cannabis legalization comes to an end, markets have reacted surprisingly bearishly to what was otherwise a highly anticipated piece of legislation. Analysts, pundits, and investors alike have looked to the cannabis sector in an effort to capitalize on the relative youth of the industry. However, despite the fact that most of the market is largely untapped at this moment, the past couple of days have been rough for big players in the industry.
Today, just two days after legalization, cannabis company stocks are still dropping. Aphria (TSX: APH), despite completing documentation for a listing on the NYSE, lost 5.9 percent. Canopy Growth (TSX: WEED) is down 4.1 percent, the lowest it’s been all week. But the worse effected is Cronos Group (TSE: CRON), which is down 9 percent, dropping by $1.27 to around $12.79 per share CAN.
As analyst struggle to identify the reason for this bearish downturn, they struggle to find an easily identifiable reason why CRON stock nearly dropped double digits in one day when all indications suggest it should do otherwise.
According to the National Post, some analysts suspect that official legalization has been these companies under the spotlight as never before. Barry Schwartz, portfolio manager and chief investment officer of Baskin Wealth Management, is one of many skeptical of cannabis-companies future performance.
“We’ll see when the earnings start to roll in if it’s true or not,” said Schwartz in an interview earlier in October. He added that current valuations “reflect every single thing that can go positive to the end of time for cannabis,” even going so far as to say that stocks are trading at “infinity times” earnings.
While cannabis companies have given promising depictions for future marijuana demand, with Deloitte predicting the total demand in Canada alone to amount to $7.17 billion, investors are equally interested in whether these companies can see profits. Investors, as well as securities watchdogs, have already proved that they’re more than willing to criticize cannabis-companies, with a recent disclosure from regulators last week being far from stellar.
“The cannabis industry has benefited from increasingly permissive legal frameworks and has grown significantly as an emerging public market sector,” said that report. “Our review identified industry-specific disclosure deficiencies, which are notable given the recent rapid growth of this industry.”
While markets have reacted sourly over the past week, new developments in the sector are plentiful. Cronos Group announced yesterday that it had signed a sponsored research agreement with the Technion-Israel Institute of Technology to evaluate cannabinoid usage for skin health and skin disorders. Regardless, the announcement wasn’t sufficient to trigger a bullish reversal.
Other factors that could be mitigating institutional investor enthusiasm is the volatility taking place throughout the area, with these recent drops reinforcing this potential risk. It’s a struggle for some to embrace this level of uncertainty.
“I’m not saying it’s not a real business, and I’m not saying there aren’t profits to be made, but anybody buying shares in these companies today has to recognize that you’re buying them with only good news,” concluded Schwartz. “Our goal is capital preservation … how can you preserve capital when you can’t even value something?”
As the week comes to an end, analysts across the world look forward to next weeks results and whether this trend will reverse over the weekend.
