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Cannabis Sector: Week Ended October 10 in Review

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The cannabis sector continued its downward movement in the week that ended on October 10. The ETFMG Alternative Harvest ETF (MJ) and the Cambria Cannabis ETF (TOKE) fell 11.22% and 9.76%, respectively, in the week. Prominent cannabis players such as Aurora Cannabis (ACB), Canopy Growth (WEED) (CGC), Tilray (TLRY), Cronos Group (CRON), and Aphria (APHA) fell 17.52%, 12.66%, 17.00%, 14.52%, and 13.81%, respectively.

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Cannabis downtrend

This ongoing downtrend is the result of several factors both external and internal to the cannabis industry. Political and macroeconomic conditions have been pressuring cannabis stocks for the past few months. Further, intensifying concerns about vaping have subjected cannabis stocks to additional regulatory scrutiny. Piper Jaffray senior analyst Michael Lavery, however, has offered an alternative take on this vaping situation.

Analysts and investors have also started questioning the high valuations of many cannabis stocks. They’re no longer satisfied with the top line growths of these companies. Some have even started questioning these companies’ aggressive revenue growth estimates. They now seem to prefer companies with robust profit margins and stable cash flows.

The still-nascent cannabis sector in emerging markets hasn’t remained immune to this downtrend. The Horizons Emerging Marijuana Growers Index ETF (HMJR) fell about 11.05% in the week. According to Bloomberg, HMJR attempts to replicate the performance of the Emerging Marijuana Growers Index.

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How the market has performed

The US market closed in the green in the week that ended on October 10. The SPDR S&P 500 ETF (SPY), which tracks the S&P 500, closed 0.97% higher. The S&P 500 Index was also up 1.27%. The Dow Jones Industrial Average rose 1.33%, or 347.58 points. The Nasdaq Composite Index rose 1.67%.

On October 11, BBC News reported that President Donald Trump was pleased with the first day of US-China trade talks in Washington. The US market seems to be awaiting a positive outcome from these talks. On October 9, Bloomberg reported China’s readiness for a partial trade deal with the US. Such a deal, however, would require President Trump not to impose any additional tariffs on Chinese imports.

Markets across the world have been waiting for an end of the trade war between the US and China. Amid this backdrop, global markets seem to be rejoicing after the first day of trade talks. The Canadian market represented by the S&P/TSX Composite Index was up 0.33% in the week that ended on October 10. According to CNBC, trade war news and increasing optimism over Brexit has also bolstered European markets. Asian stocks also seem to have picked up momentum.

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HEXO pulled down cannabis stocks

The chart above shows how 14 cannabis stocks and six marijuana ETFs performed in the week that ended on October 10. HEXO (HEXO) was among the biggest underperformers with a weekly decline of 30.63%. On October 4, HEXO announced the resignation of its CFO, Michael Monahan. Markets generally view the sudden departure of senior management as a negative indicator for a company. The stock fell 6.40% to close at $3.8 on October 5. The news further triggered Bank of America to double-downgrade the stock.

However, yesterday, HEXO reported a much higher share price decline of 22.55%. This decline came after the company withdrew its fiscal 2020 guidance. Yesterday, the company released its preliminary fourth-quarter revenue results. Its revenue fell short of its expectations.

In a press release, HEXO cited concerns such as competitive and pricing pressures, regulatory delays, and a slower-than-expected retail store rollout in Canada. After this news, shares of other prominent cannabis players such as Aurora Cannabis, Canopy Growth, Aphria, and Cronos Group also went south. Since HEXO has mostly highlighted industry-specific challenges, investors are making connections with other cannabis players. Investors expect other cannabis players to also face the negative effects of these industry-wide challenges.

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Other big movers

OrganiGram Holdings (OGI) lost close to 20.83% last week. Leaked contents of an email detailing contamination issues with the company’s cooling towers have also affected its share price.

The investor sentiment for CannTrust (CTST) remains negative. The company’s ongoing downtrend reflects this sentiment. The stock has lost 19.73% in the last week.

Emerald Health (EMH) has continued with its downward trajectory and posted a loss of 19.53% in the last week.

Supreme Cannabis (FIRE) has also lost close to 19.47% in the last week. Founder John Fowler’s sale of 1.6 million Canadian dollars’ worth of the company’s shares seems to have triggered the recent downfall. Investors are concerned about the founder’s rapidly dwindling stake in the company.

Other developments in the cannabis industry

Canada is set to legalize cannabis-based edibles and concentrates on October 17. Cannabis companies are increasingly preparing for this new market opportunity, referred to as Cannabis 2.0. Prominent cannabis players such as Aurora Cannabis, Canopy Growth, Cronos Group, and Aphria have been working on expanding their production facilities and improving their distribution networks to leverage this opportunity.

While focusing on the upcoming Cannabis 2.0 opportunity, cannabis players are also not ignoring existing market opportunities. On October 8, Aurora Cannabis and CTT Pharmaceutical announced the commercialization of the latter’s cannabinoid-infused sublingual wafers under the brand name Dissolve Strips. The companies have launched the product to target Canadian medical marijuana demand.

The cannabis sector has also seen some deal setbacks in the last week. On October 8, Aleafia Health and Aphria announced the termination of their cannabis supply agreement. On October 8, MedMen and Pharmacann mutually called off their deal, citing several external and company-specific factors.

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