Cannabis investors have had a tough year. Shares in the industry fell by half at the end of August compared to the previous year and it was big players that got hurt the most. Canopy Growth and Tilray stock fell by 54% and 64% respectively, even if smaller players were able to better weather the storm.
Cannabis investors shouldn’t be panicking just yet and despite recent setbacks overall industry trends still look positive. Here are four reasons that cannabis stocks are likely to make a big comeback in 2020.
Cannabis-containing foods are starting to take off in Canada
While many smokers have moved away from the black market high taxes, and a concern about health, has held the industry back. This has led to an explosion in cannabis and CBD edibles and beverages.
Until recently, Canada only approved the sale of buds, oils (dyes) and gel capsules. Now that has changed. Canada has recently paved the way for edible products and cannabis drinks. They will hit the shelves in December. This development will generate a lot of interest among cannabis investors and provide a huge boost to the industry as a whole.
“We will see a multitude of new products coming to market,” says Korey Bauer, portfolio manager of the Cannabis Growth Fund. “We think it’s going to be huge for these companies.”
“Personally, I am very excited about the legalization of edible products in Canada,” says Emily Flippen, investment analyst at Motley Fool. She says it will give companies the opportunity to sell higher margin products and get rid of their commodity status.
To understand why, consider the popularity of these products in the U.S. market. Cannabis products – as opposed to ordinary buds – account for about 60% of sales in the US legal markets and a disproportionate percentage of growth, according to Stifel’s analyst W. Andrew Carter.
Smart investment will help good companies thrive
One of the big problems facing the cannabis sector at the moment has, ironically, been investment. Over $10 billion was invested into the cannabis sector over the course of 2018 but much of it went to the wrong places. A focus on growers, rather than producers, has led to a glut of cannabis with nobody to sell to.
In order for the sector to thrive smarter investment is needed. That is where cannabis focused investment firms like GreenStar Biosciences Corp.’s (CSE: GSTR) come into their own. The company targets high potential, locally competitive, cannabis companies across North America and provides them with the capital they need to expand their operations.
GreenStar’s first success story is Cowlitz, a Washington based producer. Cowltiz focuses on providing high quality cannabis products at a low cost and continues to generate revenue of over $4 million per month and growing.
From an investment perspective companies like GreenStar are positive for the industry. By leveraging significant experience in the cannabis sector they are able to ensure that money goes to cannabis companies with strong fundamentals who are likely to succeed, and boost the industry as a whole.
Cannabis sales continue to grow
“People really like to go into stores, see the product and talk about its effects,” says Bauer of the Cannabis Growth mutual fund. “It is crucial for these stores to educate people about what they are buying.”
In other words, the number of stores is the key to sales, and it turns out there are not enough in Canada. But that will soon change. Canada has recently organized lotteries to license developers to operate stores. “The store shortage will be fixed,” says Bauer. “We think it will be absolutely huge in the next 24 months.”
The run of bad news is likely to come to an end
One of the main reasons why marijuana stocks have fallen has been an avalanche of bad news in recent months.
For example, the supplier CannTrust was under fire from the media due to the case of illegal plantations.
“This has really shaken confidence in the sector because they were considered safe and approved,” said Todd Harrison, Investment Manager at CB1 Capital.
For their part, suppliers Canopy Growth, Tilray and HEXO all posted poor quarterly results. The same is true for Charlotte’s Web, which sells cannabidiol (CBD) for allegedly medical purposes.
Canopy’s board of directors fired its CEO in a surprise decision that shook many investors.
Quebec announced severe restrictions on edible products because it was concerned that children might like them too much.
This glut of bad news shook investor confidence in the sector but this is likely to change over the coming quarters and it is likely that the cannabis sector will see a strong recovery.