Canadian cannabis stocks are down over 40% since peaking in early January, leading analysts to speculate about what might ultimately trigger a rebound.
The Canadian Marijuana Index, a basket of the leading cannabis stocks operating in Canada, is 40% off its peak, or a loss of nearly 15 billion Canadian dollars ($12 billion) in market capitalization.
The index was down as much as 7% in morning trading Wednesday but rebounded to close even by the end of the day.
The volatility is an extension of a months-long correction that some analysts said was overdue. They contend marijuana share prices had climbed to unreasonably high levels by early 2018.
Among the biggest losers so far this year are Aphria (down as much as 45%), MedReleaf (down 40%) and Aurora (down 38%).
Canopy Growth lost 13% over the same period, while Cronos and CannTrust fell 25% and 26%, respectively.
Amid the selloff, Eight Capital analyst Daniel Pearlstein sent a bullish research note to clients Wednesday, recommending investors take “a tactical approach” and keep an eye out for major industry developments, or “catalysts.”
“We had said back in January that we’d be watching for April as the next entry point – and we believe that time has come,” he wrote in the note. “We still view the largest Health Canada LPs as the best way to play the sector.”
Some developments experts are watching for include:
- Insurance coverage for medical cannabis
- Senate approval of adult-use legislation
- Retail license awards for recreational marijuana
- Further financing involvement from “big 5” Canadian banks
- Supply agreements between provinces and producers
- Pharmacy chains jumping aboard MMJ
- More involvement in cannabis from pharmaceutical companies
- Greater involvement of firms in established industries, like tobacco and alcohol
- U.S. Food and Drug Administration approval of a cannabinoid drug in June
Jason Zandberg, analyst at PI Financial in Vancouver, British Columbia, said previous major industry developments have led to stock price rallies over the past year, such as Constellation Brand’s investment in Canopy.
However, Zandberg warns that investors “need to be selective.”
“Quality always wins out in the long run, so stick with the market leaders.”
Financing down but not out
Crashing stock prices usually reduce or eliminate equity financing.
Not this time.
“Surprisingly, with the large drop we still have very healthy demand for certain equity financings, but there will likely be some that are delayed,” Zandberg noted.
Financing had been exclusively led by investment banks such as Canaccord Genuity and Eight Capital, but falling stock prices didn’t deter one of Canada’s biggest banks from providing financing to cannabis businesses.
And more banks appear to be warming to working with the industry.
Stocks ‘inflated’
Some analysts don’t expect cannabis stocks to revisit their highs anytime soon.
Chris Damas, editor of the Barrie, Ontario-based BCMI Cannabis Report, cited the March 30 article “Marijuana Stocks Could Be a Buzzkill” in Barron’s as the catalyst for the recent downturn – a demonstration, he said, that international investors are important to Canadian cannabis stock prices.
“Stocks are coming back to Earth after a very unusual spike in December,” Damas said in February. “They had no business being where they were and now they’re coming back to more reasonable levels.”
And now?
“Stocks have been inflated in price for a long time,” he said.
“(Cannabis) stocks remain in a bearish trend. We don’t think analyst estimates for recreational cannabis sales volumes and margins are reasonable.”
Matt Lamers can be reached at mattl@mjbizdaily.com
