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Did the Cannabis Sector Bottom Out in 2019?


Dec. 31 2019, Published 3:56 p.m. ET

This year was tough for the cannabis sector, especially given that the S&P 500 was making new highs. The S&P 500 Index hit a new high of 3,247.93 on December 27. It was trading at 3,221.29 on December 30, up 28.5% since the beginning of the year. In the same period, the Horizons Marijuana Life Sciences Index ETF (HMMJ) and the ETFMG Alternative Harvest ETF (MJ) fell 43.1% and 35%, respectively.

As of December 30, HMMJ was trading at 8.17 Canadian dollars, close to its 52-week low of 8.14 Canadian dollars. On the same day, MJ was trading at 16.21 Canadian dollars, 1.6% higher than its 52-week low of 15.95 Canadian dollars. Rising operating losses, thriving black-market sales, pricing pressures, the slow opening of new stores in Canada, and worries regarding vaping-related deaths appear to have dragged the sector down.

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CannTrust Holdings (TRST), MedMen Enterprises (MMEN), Aurora Cannabis (ACB), and HEXO (HEXO) were some of the underperformers this year. MMEN, TRST, ACB, and HEXO have lost 85.2%, 82.8%, 63.3%, and 57.5% of their stock values, respectively. The termination of its merger agreement with PharmaCann, claims of financial irregularities, and the sale of its noncore assets appear to have caused MedMen stock to fall.

Following a series of compilation issues, Health Canada suspended the cultivation license of CannTrust. These events led its stock to fall. Weak performance in the last two quarters, rising debt, and falling cash could have caused ACB to fall. So will 2020 be a good year for the cannabis sector?

Why 2020 could be better for the cannabis sector

We believe that the marijuana sector has bottomed out, and there’s less scope for further decline. The introduction of Cannabis 2.0 products and the measures adopted by various Canadian provinces to open up their retail cannabis markets could drive the cannabis sector. Through Cannabis 2.0 products, companies can differentiate their products and also command higher prices. So, these products could improve cannabis companies’ margins. Also, derivative products require huge capital, and it will be difficult for illicit businesses to replicate them. Therefore, Cannabis 2.0 products could decrease illegal sales.

Recently, many cannabis players blamed the slow rate of new store openings in Canada for lower sales. However, prominent provinces, such as Ontario and Alberta, are undertaking initiatives to open more stores. These new stores could increase accessibility for customers, thus driving marijuana sales.

With more information on the benefits of marijuana usage now available, many US states are opening up to it. Illinois has allowed the sale of recreational cannabis from January 1, 2020. However, we believe the legalization of marijuana at the federal level and the passage of the SAFE Banking Act could significantly impact the cannabis sector. The SAFE Banking Act would allow banks to conduct business with cannabis players. Banks will be able to lend to marijuana players who are in dire need of capital to fund their expansions.

We also expect the shift in cannabis companies’ focus to profitability and the effective use of capital to drive the sector in the next year. For more marijuana-related news and updates, please visit 420 Investor Daily.


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