Forget Abnormal Returns, Cannabis Delivered Abnormal Losses

Canada legalized recreational cannabis on October 17, 2018. In December 2018, the Trump administration legalized hemp at the federal level. As a result, investors had high hopes for the cannabis sector in 2019. However, the euphoria didn’t last long. Overall, 2019 turned out to be the worst year for the cannabis sector. The ETFMG Alternative Harvest ETF (MJ) has lost 35% of its stock value YTD (year-to-date) as of December 30, while the Horizons Marijuana Life Sciences Index ETF (HMMJ) has fallen  43.1%. Meanwhile, the S&P 500 Index had returned 28.5% during the same period. We’ll discuss what caused the cannabis sector’s underperformance.

Why did the cannabis sector underperform?

Although the federal government in Canada legalized recreational marijuana, retail stores opened slowly. The lack of a retail footprint dented cannabis players’ sales. Also, black market sales thrived due to fewer marijuana stores and higher prices. The lower sales caused an oversupply of marijuana products, which put pressure on the pricing.

In the US markets, the FDA didn’t approve CBD products except for Epidiolex, which treats seizure disorders in patients over two years old. So, cannabis players can’t transport their products across the states. In November, the FDA stated that due to a lack of scientific data, it couldn’t conclude that CBD was safe. The agency warned consumers that CBD could cause liver injury, drowsiness, and diarrhea. Along with these factors, vaping-related deaths in the US led to a decline in marijuana sales.

Many cannabis players, like Aurora Cannabis (ACB), were expected to report positive EBITDA this year. However, the companies didn’t meet the expectations. HEXO (HEXO) withdrew its fiscal 2020 guidance due to a decline in the demand for marijuana. Cannabis players’ operating expenses rose due to lower sales. Aphria (APHA) is one of the few prominent marijuana players that managed to report positive EBITDA. All of these factors led to a fall in the marijuana sector.

Prominent marijuana players’ returns

Only a few marijuana companies, like Curaleaf Holdings and IIPR, reported positive returns in 2019. Curaleaf and IIPR have returned 19.5% and 61.8% YTD, respectively. Curaleaf’s stock price rose due to the acquisition of Select and Grassroots Cannabis, lower-than-expected losses in its last quarter, and optimistic 2020 guidance. The strong performance in the previous two quarters caused IIPR stock to increase. During the same period, Aurora Cannabis, HEXO, Cronos Group, Canopy Growth, and Aphria fell 63.3%, 57.5%, 40%, 33.1%, and 21.5%, respectively.

However, we expect 2020 to be better for the cannabis sector. The introduction of Cannabis 2.0 products, the expanding retail footprint in Canada, and more states in the US opening up to cannabis could drive the sector.

Please visit 420 Investor Daily for more marijuana-related news and updates.