Why Marijuana Stocks Are Dropping

 Marijuana Stocks
iStock.com/Onypix

Why Are Marijuana Stocks Falling?

February 2018 is not a month that will be looked back on fondly by marijuana bulls. The industry has been absolutely slaughtered over the past month, with many companies losing over 20% of their value over the course of four weeks.

These marijuana stocks falling can be attributed to a variety of factors, with everything from U.S. Attorney General Jeff Sessions to the Canada marijuana legalization delay potentially playing a role.

Marijuana Industry Correction

A correction in the marijuana sector is, in my view, the most probable reason we’re seeing such a drawback among marijuana’s biggest players.

Frankly, the problem is that marijuana companies grew too fast at the end of 2017. Many of the biggest names saw high double-digit, even triple-digit growth in the span of a few short months.

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The problem with such massive upswings is that they often end up creating an atmosphere of hype, which then feeds into an even more frenzied buying period, pushing value up even further, and so on and so on until the cycle hits a terminal point.

In the wake of that strong buying period, you’re left with companies that are overvalued, or at least investors may believe them to be overvalued. Next, then is a sell-off.

Bitcoin serves as a useful analogue here, with prices skyrocketing as wild projections were made, only for the buying frenzy to cease and prices to fall back into the realm of reality.

It’s useful to view this correction like a speeding ticket. The marijuana bubble that bears love to reference at every downturn has not yet burst, in my opinion, with the strongest gains for the industry still ahead.

But these types of volatile swings are expected in an emerging market. Moreover, this goes double for marijuana, due to its high visibility in the media.

Again, Bitcoin serves as a good comparison.

Both Bitcoin and marijuana are often spoken about in the media, far more than other stocks. Why? Because they’re exciting not only to investors, but to the layperson as well.

People who have never so much as glanced at a quarterly financial report are investing in Bitcoin and marijuana due to this media exposure—in a way that they aren’t investing in, say, lithium. It’s a curse and blessing, because you inject more capital into the industry but at the cost of having a number of fickle buyers.

At the end of the day, there’s a lot to like about marijuana stocks. The correction came and investors are certainly hurting, but it will not be permanent and it will not be the end of the industry. These stocks will bounce back and, I hate to say it, will face other dire corrections in the future. But that’s the nature of this industry at this moment. I believe that, long-term, investors stand to make their money back and then some on marijuana stocks, even with these wild swings.

U.S. Marijuana Crackdown

We’ve covered this multiple times, but it bears further examination, following this recent drawback in marijuana stock value.

Marijuana legalization in the U.S. is the Holy Grail of the industry. With all that cash and hundreds of millions of people as potential consumers, federal legalization of the drug would be a massive gain for the industry.

The problem is that, due to the current White House administration, that reality seems further away than it has in over a decade. Government officials like Attorney General Sessions have gone in the total opposite direction; they want to impose more regulations on marijuana, not less.

Sessions has spoken many times on marijuana, and has near-universally reiterated his distaste for the drug and his belief that it is, in fact, dangerous to the public.

This has led to some concerns that there may be a U.S. marijuana crackdown in the future. I highly doubt that. There simply isn’t enough motivation at the top of the administration for President Donald Trump to actively challenge state laws by imposing federal restrictions on pot.

Not to mention, not too long ago, there were rumors that Trump was looking to replace Sessions. The reasons for that potential firing were totally unrelated to marijuana, but I can’t imagine the two men are exactly best of friends following that debacle.

Which is to say, while a U.S. crackdown on marijuana is unlikely, the simple possibility of a federal attack on the drug has put the industry in a tough spot.

In Canada, for instance, companies like Aphria Inc (OTCMKTS:APHQF), (TSE:APH) have divested from U.S. assets, not because they have a genuine fear of the U.S. government, but because of concerns by the Toronto Stock Exchange (TSE) that there could be a potential crackdown on marijuana. The group running the TSE threatened to delist companies that did cannabis-related business in the U.S., even in states where the drug was totally legal.

So, while a U.S. marijuana crackdown is unlikely, the threat of one has been enough to cause turmoil in the industry, at least to a minor degree, with investors likely factoring in an unfriendly presidency into marijuana industry projections.

It’s worth remembering that the Trump administration and its anti-marijuana stance is only going to be in office for three more years, barring reelection, and that many politicians in the U.S. are opening up to the idea of federal legalization of the drug, or at the very least decriminalization.

Again, corrections and drawbacks happen, but long-term I’m still bullish on marijuana stocks in 2018.

Canada Marijuana Legalization Delay

One of the biggest drivers of the marijuana industry over the past year has been the upcoming marijuana legalization in Canada.

When Prime Minister Justin Trudeau won the election in 2015, he did so partly due to a promise that he would legalize recreational marijuana across Canada. In 2018, that promise is set to be fulfilled.

But, due to a political shell game, a Canada marijuana legalization delay ensued. Whereas analysts had factored in an early summer legalization date, politics caused it to be pushed back to August at the earliest, and potentially a few months after that.

The delay naturally played a part in the downturn we’ve seen in the marijuana industry.

The delay is only temporary, however. There’s virtually no chance that marijuana legalization in Canada is put on any sort of permanent hold. Still, pushing the legalization date back by more than a month affects projections and estimates. This, in turn, affects stock value.

Why Major Pot Stocks Dropped

What the market experienced is something I’d characterize as death by a thousand cuts versus some single cataclysmic event bringing down the industry.

Even the best marijuana stocks have been hurt by the downturn, with only a few outliers making it through the month without too much pain.

Below we’ll examine three of the industry leaders and how their stock performed in February.

Marijuana stocks chart

Chart courtesy of StockCharts.com

Canopy Growth Corp (OTCMKTS:TWMJF), (TSE:WEED), the largest marijuana company by market cap, suffered in February but performed better than most.

WEED stock was down by about 20% by the end of the month, although it is only down by about six percent through 2018. While that’s not what investors want to see out of Canopy stock, the company is still riding the high of its massive gains in January. So, for those who invested in late 2017, WEED stock is still very much a solid portfolio addition, and the company will bounce back once the correction subsides.

Aphria Inc (OTCMKTS:APHQF), (TSE:APH) has been one of the hardest hit companies this year so far, down 27% since the beginning of 2018 and down 37% in February alone.

APH stock has been unable to push back against the downturn, unlike Canopy, which scored several days of gains in February despite the overall poor showing.

The U.S. divestments and the threat of being delisted from the TSE did not help matters.

Aurora Cannabis Inc (OTCMKTS:ACBFF), (TSE:ACB) has had one of the better years so far when compared to its large competitors, scoring a 22% gain since the beginning of the year. That’s even after factoring in its 27% drop in February.

ACB stock has been the beneficiary of smart purchases and global expansion, both of which have put the company in a strong position in the marijuana market.

Analyst Take

Corrections happen. In volatile markets—especially emerging markets like marijuana—where so much is up in the air legally and socially, it’s not unexpected for downturns like this to take place.

The important thing is to remember that the sky is, in fact, not falling.

The weed market is still very much in a strong position to be one of the fastest growing markets around. There’s a tonne of upside for marijuana companies, with huge potential for growth and literally billions of consumers in untapped markets.

Will legal marijuana companies be able to reach those billions of consumers in the near future? Probably not. But they will certainly be hitting tens of millions—maybe even hundreds of millions—in a few years’ time. With that in mind, this is still one of the most exciting investment opportunities around, with upside and potential that is unmatched by nearly any other industry.

This is not the first marijuana market drop and it will not be the last. But, in my view, the things that caused this downturn—political posturing and inflated growth—are not going to doom the industry and don’t detract from its brimming potential.