It’s a question that’s on everybody’s mind as we look at the last week or so of cannabis stock activity – why isn’t Canada legalization creating that big bump?
The most recent reporting this Halloween shows that in fact major marijuana stocks have been trending steadily down since our neighbors to the north began to enjoy recreational marijuana on a free open market.
Analysts at Motley Fool have an interesting explanation for why these stocks are tanking instead of soaring right now.
The idea, outlined in an article by Sean Williams posted this morning, is that ironically, the solid opening of the recreational marijuana market in Canada makes an abstraction into a reality. That, analysts argue, creates more tangible expectations and when those aren’t met, investor confidence takes a slide.
You can see some of the wide gaps between actual production and expected production in the Motley fool article:
“Aurora, CGC, Aphria and the Green Organic Dutchman) are expected to produce 570,000, 500,000, 255,000, and 195,000 kilograms, respectively, when fully up to speed,” Williams writes. “Yet, their current run rate is 45,000 kilograms for Aurora Cannabis, about 40,000 kilograms for Canopy … 35,000 kilograms for Aphria, and zilch for The Green Organic Dutchman, which won’t even have a harvest till next year. Combined, that’s less than 10% of their projected aggregate peak output.”
But if those numbers seem like a big deal, experts are pointing out that delivery and production will ramp up over time – it’s only natural. Are investors being too impatient in wanting to get today’s peak numbers right away?
Regardless, people are also talking about possible oversupply taking down the price of marijuana per gram. That seems to make sense to people reviewing legalization as a government takeover of the market – from something that’s furtively traded on the black market to something that gets institutional buy-in.
Here’s a third thing to consider for those who are shaky about marijuana stock declines recently – the same analysts are pointing out that there’s going to be an expansion of the kinds of things that people will buy with recreational marijuana in them.
In other words, product development is lagging because legalization is so new. For instance, we have edibles on the market, but we don’t have marijuana-infused drinks and other kinds of extra goodies that will probably boost the industry in the long term, when legalization is defined a little more.
Then there’s the bubble theory to deal with – when it comes to price changes, how much is too much? Take Canopy Growth Corp. where enormous gains in August and September led up to a $50 peak – contrasted with the reality that CGC is now trading down toward $30.
You can look at the historical chart two ways – you can see that there is a solid gain from 2016 to the beginning of 2018, or you could see that there’s a sharp decline from the high lately. In the short term, investors will be looking for the next bounce either way – and in the case of CGC, as we reported last week, CEO Bruce Linton is still very confident about all of these projected rises based on very real arguments about the industry as it stands right now. With that in mind, continue to look closely at the cannabis markets you’re in, to figure out whether October’s decline is a one-off or a harbinger of something more sinister as the trick-or-treaters come out to play.
