The cannabis stock craze—a boon for the global economy or a dotcom in disguise?

Source: Unsplash.com | Photographer: Roberto Valdivia

Depending on who you ask cannabis was, up until recently, one of two things—a medical drug or a laziness-inducing opiate. This all changed when Canada recently announced out of the blue that it’s going to legalise the recreational use of marijuana.

Suddenly, what was once an illegal substance has since become a highly sought-after asset for many professional investors and common folk alike as both attempt to cash in on a multibillion dollar business. But will this industry be here to stay?

July 2018—the official start of the cannabis season

 

In January, US Attorney General Jeff Sessions swore that he would revert Obama’s policies responsible for the legality of cannabis in several US states. But some states, like Massachusetts and New Jersey, followed through the legalisation process anyway, encouraging many investors to put money in companies in the marijuana industry.

This gave cannabis stocks a significant price boost as people were suddenly racing to purchase Canadian-listed companies which sought to expand their marijuana operations on US soil. But even that was nothing compared to the impact that Canada’s official statement in July had on the growing cannabis business.

In August, everyone wanted a piece of the green pie

 

The overwhelming buzz and excitement that followed were immediately picked up by the markets. In the first days of August, the Nanaimo-based Tilray Inc. saw its shares skyrocket by a whopping 34% just days following the announcement, reaching a market cap of $2.1 billion on August 15.

At roughly the same time Acreage Holdings, an investment company with growing connections in the marijuana industry, managed to raise as much as $119 million—the largest cannabis-related private funding secured by a US company.

Cannabis Growth Corporation (CGC) stocks also soared for the period, as seen on the graph below, with price per share surging by 79.11% and reaching its peak performance around 30 August.

 

CGC stock price graph (July August)

Source: DF Markets

 

Cronos Group (CRON), one of CGC’s main competitors in the industry, also enjoyed an impressive growth of 3.94 points or a price per share boost of 66.86% (as seen below), with the price peaking around 28 August.

 

Cronos stock price graph (July August)

Source: DF Markets

 

On August 27, Canadian pot stock prices were further boosted by rumours that alcohol companies were planning to produce cannabis-infused beverages. Almost immediately:

Tilray Inc. shares rose by 21.84% and hit a new record of $53.44 per share;

Shares of Aphria Inc., a Canadian medical pot company, went up by 6.85%.

The cannabis market was slightly weaker in September

 

Despite a promising start, the cannabis business slowed to a crawl when the US Customs and Border Protection issued a rather aggressive statement that its border policies will not be updated to meet Canada’s upcoming cannabis legalisation. Now, every Canadian who openly smokes cannabis, works in the industry, or is actively investing in marijuana would be subjected to a lifelong ban from entering the US.

While the news somewhat cooled off investors’ interest in the sector, the cannabis market was quick to recover. By the end of the month, Canadian cannabis producers’ market cap already rivaled big names like Twitter and CBS. Surprisingly, the US Drug Enforcement Administration (DEA) itself contributed to this growth by announcing on 27 September that a specific anti-seizure cannabis ingredient was no longer considered a first class drug.

If we look at the graph below we would see that the CGC stock followed market sentiment closely, with it’s August highs being nearly erased as we approach the middle of the month—the point in time when the US border patrol refused to comply with the new Canadian law. Despite this, the company’s stock still managed to grow by an additional 16.65%, with its price peaking on 24 September.

 

CGC stock price graph (August-October)

Source: DF Markets

 

Cronos Group stocks shared it’s competitor’s fate and, similarly, its stock price was a wild roller coaster ride for the entire month. Still, the marijuana producer reported an even bigger stock price growth of 40.16%, with it peaking around 20 September.

 

Cronos stock price graph (August-October)

Source: DF Markets

Two factors that contributed to pot stocks’ worldwide success

Cannabis as a medicine

Perhaps the main reason for the investors’ booming interest in the “forbidden” plant was Tilray Inc. Reporting less than $20 million in revenue in the first half of 2018, the medical marijuana producer’s stock has since grown by nearly 500%, aided by an official announcement from the DEA that it will partner with the company to export marijuana from Canada to the US for clinical research purposes.

Cannabis as a beverage

With Canada’s marijuana legalisation day approaching, a new movement emerged among leading beverage manufacturers—that of combining alcohol with Cannabidiol (CBD), a substance in the cannabis plant with a pain-soothing effect.

Among the first to enter the cannabis beverage market was Constellation Brands, mainly known for its popular Corona beer brand. On 15 August, the company invested a record $4 billion into the Canadian-based medical marijuana company Canopy Growth.

Naturally, others soon followed suit. In September, Guinness maker Diageo Plc spoke to Canadian marijuana producer Aurora Cannabis about possibly signing a deal, while on 23 September Coca-Cola stated that it’s exploring ways of producing CBD-infused drinks.

With everything said so far, are we staring at another financial bubble?

 

Pot stocks are in a much better state now than they were at the start of 2018. On September 12, weed stocks reached a total market capitalisation of $51 billion—the largest cap this industry has seen in its recorded history.

This development worries economists to no end. At the moment of writing, both short-sellers and investors have invested a total of $1.7 billion in pot stocks. However, not many of these short-sellers are buying shares to cover their positions despite the ballooning marijuana prices.

Seeing the impending price plunge, many experts are now advocating against marijuana investments, stating that they are an extremely volatile and speculative investment and comparing them to the recent crypto surge or the 1990s internet company craze (a.k.a. the dotcom boom) that eventually collapsed under the weight of too many broken promises.

Among these heralds is the chairman and CEO of CannaRoyalty, Marc Lust, who urged investors to think twice before joining in on what may be a short-lived trend:

“A lot of money has been made that is for sure. . . . But a lot of companies are probably overvalued and it’s risky for investors. Do your research first.”

Another indicator that cannabis stocks may head towards a bearish outlook is that many US states are yet to lift the ban on the free trade and use of the plant. And while it’s too early to speculate whether the cannabis market can outgrow its volatility and become a sustainable business, we strongly urge both traders and investors to double- and triple-check their research before fully committing to backing cannabis-associated companies.

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We would like to remind you that in August we expanded our range of shares by adding two leading companies in the medical marijuana market: Canopy Growth Corp and Cronos Group.

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