Cannabis stocks fail to fire
Pot stocks have been a crushing disappointment to the retail investors who jumped into the market when they listed in the mid to late 2010s. In spite of cannabis legalisation in Canada and a number of US states, sector growth is slow. US President Joe Biden’s decision to pardon federal offences of simple marijuana possession and review how the drug is classified is a boost. But it is not enough to untangle the plant’s complicated status.
In the US, the biggest markets for cannabis are in Florida, California and New York. Sleek dispensaries have helped banish negative associations. So have celebrity endorsements.
But legal treatment remains a hurdle. US states can opt to make cannabis legal for medical or recreational use, but state-by-state regulation makes it difficult for companies to scale. Under federal law, cannabis is classified at the same level as heroin. Financial services companies will remain wary of providing lending and payment processing while it is illegal at a federal level. Institutional investors steer clear, too.
Prices for US-listed marijuana companies such as Tilray, Curaleaf, Aurora and Canopy rose by up to a third in the aftermath of Biden’s announcement. But none trade anywhere close to the highs of 2018, when legalisation led to forecasts of a potential US$100 billion ($176b) industry. The ETFMG Alternative Harvest exchange-traded fund is down 88 per cent from September 2018.
Some of the fault lies with the companies and their outsize predictions. Tilray wrote of a global paradigm shift when it listed in 2018. Two years later it sold out to rival Aphria, becoming the largest cannabis stock. In the last set of quarterly results, sales fell 9 per cent compared to the previous year. It remains lossmaking.
High prices and health concerns add further barriers to growth. Research from the Cato Institute, a US think-tank, found the price of highquality marijuana was around US$230 an ounce in Washington state. Legalisation is not the cure-all the sector once hoped it might be.