The marijuana industry is very volatile right now. On Monday, cannabis stocks crashed hard. The Horizons Marijuana Life Sciences ETF fell 9.5%. The crash was mainly fueled by the global stock market fall due to fear about the coronavirus and declining oil prices. None of the concerns impact the marijuana industry directly. However, I wouldn’t say that marijuana stocks are safe either. So, should you consider investing in marijuana stocks in March?
Marijuana stocks fell on Monday
On Monday, marijuana stocks had a hard fall along with the global stock markets. The coronavirus is spreading globally and panic has hit all the sectors as well as the economy. The decline in marijuana stocks wasn’t directly related to the coronavirus outbreak. Aurora Cannabis (NYSE:ACB), Canopy Growth (NYSE:CGC), Cronos Group, and Hexo (TSE:HEXO) fell by 19.6%, 13.4%, 9.4%, and 14.6% on Monday. Meanwhile, Tilray (NASDAQ:TLRY), Aphria (NYSE:APHA), and Organigram fell by 23.4%, 9.8%, and 10.1%, respectively.
However, most of the marijuana stocks bounced back again on Tuesday. Marijuana stocks have been on a rollercoaster ride since 2019. So far, 2020 hasn’t been that good either. The coronavirus has impacted the marijuana industry differently compared to other sectors. Marijuana companies that obtain their vape products and parts from China might be impacted slightly due to a halt in manufacturing and export restrictions. Tilray’s management stated during the fourth-quarter earnings call that some branded vape hardware might be delayed due to the outbreak.
Meanwhile, the coronavirus caused a bump and a slump in marijuana sales. Read Is the Coronavirus Impacting US Cannabis Sales? to learn more. Many places are seeing a bump in sales because people are stocking up on their medical marijuana supply. In other places, stores are seeing fewer customers because people are concerned about being in public places. However, these factors won’t impact marijuana stocks in the long run.
What’s happening with marijuana stocks?
Marijuana stocks can only see an upside when companies’ financials improve. Even after a year of legalization, slow store roll-outs in Canada impacted the revenue. Rising black market sales added to the concerns. Aurora Cannabis, Canopy Growth, Tilray, and Hexo had to adopt cost-cutting strategies like shutting down plants, laying off employees, and making leadership changes to hit profitability.
There’s hope that Cannabis 2.0 products will work their magic this year. Also, Canada is being lenient and allowing more legal shops to open this year. However, analysts don’t expect all of these changes to show results until the fourth quarter of 2020. Right now, some marijuana companies are in a serious financial crisis. Some of the companies might not even survive until things rebound. Smaller marijuana companies are on the verge of bankruptcy. Federal prohibition has forced some of the companies to seek bankruptcy protection in Canada.
Should you consider investing in cannabis stocks in March?
Bigger cannabis players aren’t safe either. While Canopy Growth and Cronos Group have a safe cushion with Constellation and Altria’s investment, Aurora Cannabis is buried with debt. Tilray faces the same issue but it’s hopeful. Aphria is surviving under Irwin Simon’s leadership. Notably, OrganiGram is in a better financial position than other companies. Some marijuana stocks like Hexo, CannTrust, and Sundial Growers might get delisted from the stock exchange. When a stock’s share price falls below $1, it has a few months to get back on track before it’s delisted from the exchange.
Last month, a Cowen analyst downgraded Aurora Cannabis, Tilray, and Sundial Growers. The analyst thinks that Cannabis 2.0 isn’t showing the expected results. The analyst reduced the 2020 Canadian total addressable market forecast by 32% to 3.5 billion Canadian dollars in legal sales. Meanwhile, the analyst kept the “market perform” rating for Cronos Group.
On Tuesday, Stifel initiated coverage of Aphria with a “hold” rating and Hexo with a “sell” rating. Analysts hope that Aphria will survive the cash crunch due to its strong balance sheet. However, analysts doubt that Hexo will be able to survive the cash crunch due to its declining fundamentals and current management. To learn more, read Stifel Initiated Its Coverage on Aphria and HEXO.
Aurora Cannabis, Canopy Growth, Cronos Group, and Hexo rose 3.2%, 7.2%, 3.6%, and 3.9%, yesterday. Meanwhile, Tilray, Aphria, and OrganiGram rose 2.2%, 3.5%, and 5.0%, respectively.
What do I think?
The marijuana industry is volatile but evolving. In a growing industry, headwinds can soon turn into tailwinds. Along with many other analysts, I think that marijuana is the only sector that can compete with the alcohol, tobacco, and pharmaceutical sector. Even alcohol and tobacco companies are choosing to invest in marijuana stocks. I agree that federal legalization looks hazy right now. The Trump administration wants to keep marijuana illegal under federal law. However, President Trump is known to make drastic decisions. Federal legalization in the US could help the situation turn around quickly. The revenue might improve in Canada as well. More US states are heading towards legalization. I think that marijuana stocks are a “hold” right now until we get a clear picture of what’s happening in Canada.
Investing in a slow-growing industry like marijuana requires patience and a stomach to handle the risk. As a result, investors should be cautious and research the sector before making any investment decisions.