On December 26, as reported by CNBC, a Santa Claus rally seems to be in full swing. This calendar effect pushed the S&P 500 (SPX) and Nasdaq Composite Index (COMP) to record highs. S&P 500 Index rose YTD (year-to-date) by 29.24%. It closed at $3,239.91 on December 26.
Nasdaq and Dow Jones hit record highs
Also, Nasdaq breached the 9,000 level for the first time and closed at $9,022.39. Nasdaq is up YTD by 35.98%. Also, the Dow Jones Industrial Average (DJIA) gained 22.69% YTD and closed at $28,621.39 on December 26.
According to Marketwatch, a Santa Claus rally is a market anomaly characterized by a significant spike in the stock market during the last five days of December and the first two days of January. Per The Cannabis Investor, the reasons for this calendar effect are multifold.
The overall optimism during the holiday season coupled with Christmas bonuses leads to increased retail buying. Investors also put more into the stock market to optimize taxes. Low overall liquidity in the market due to limited participation of institutional investors makes it easier for bullish retail investors to push up the market.
Let’s see if the cannabis stocks benefitted from the Santa Claus rally.
More recreational purchases may trigger Santa Claus rally
On December 26, ETFMG Alternative Harvest ETF (MJ) closed 2.39% lower to $16.73. Plus, Aurora Cannabis (ACB), Canopy Growth (CGC), Cronos Group (CRON), and Aphria Inc. (APHA) have not seen upward momentum. The Santa Claus rally has yet to make its presence felt in the cannabis sector.
On December 24, Marijuana Business Daily reported a rise of more than 50% on average category sales of recreational cannabis products in the pre-Christmas week. This analysis was based on 2018 data from the Seattle-based cannabis analytics firm Headset.
So, the average daily sales of recreational cannabis products in Nevada, Washington, California, and Colorado were higher by 11%—53% in the pre-Christmas week, just before the Santa Claus rally. Average daily sales of beverages, concentrates, edibles, and topicals were up by 36.1%, 11.6%, 36.4%, and 53.3%, respectively.
Per Marijuana Business Daily, people may be buying the recreational cannabis products either for gifting or for personal use in the holiday season. Cooper Ashley, a data analyst for Headset, claimed that topicals are most likely purchased as gifting options.
Individuals may be buying edibles to consume cannabis-infused versions of their favorite holiday treat. Finally, customers may be buying cannabis-infused beverages as an alternative to alcohol for non-drinkers.
Investors continue to be spooked by industry challenges
If there was ever a need for a Santa Claus rally, it is now. The year 2019 has been really difficult for the cannabis industry. Chubb LTD (CB) and CGC are down YTD by 59.68% and 28.47, respectively. Also, CRON is down YTD by 34.36% and HEXO Corp. (HEXO) is down by 55.39%. Lastly, APHA is only down YTD by 15.29%.
Macro-economic uncertainties, trade war, and Brexit drama contributed to the volatility in the nascent cannabis sector. Also, the industry is battling the vaping crisis, pricing pressures, regulatory delays in Canada, and the federally illegal status of marijuana in the US. Also, black market players affect revenue growth prospects. They also affect the credibility of the legal cannabis industry. Finally, very few of the companies were EBITDA-positive in 2019.
Cash crunch projected for 2020 after Santa Claus rally
A severe cash crunch is putting at stake the very existence of many cannabis companies. On December 26, managing director of Entourage Effect Capital Codie Sanchez had some keen insights.
He highlighted that cannabis companies need to have the cash to sustain operations for the next 12 months after the Santa Clause rally. Sanchez expects this cash asset to allow companies to face a tough economic environment. ACB’s ex-COO, Cam Battley, also highlighted the possibility of fewer cannabis companies at the end of 12—24 months across the world.
Per MJBiz Investor Intelligence, CRON is the best-funded cannabis company with cash sufficient to sustain operations for almost 15 years. CGC and Green Thumb Industries (GTII) (GTBIF) have the cash to sustain operations for around four and a half years.
Most companies don’t have cash assets
However, Tilray Inc. (TLRY) and HEXO have cash just enough for around 1.2 years. Further, ACB and CannTrust Holdings (CTST) have cash assets that will see them through little more than six months. MJBiz Investor Intelligence particularly highlighted MedMen Enterprises (MMNFF) and Vireo Health International (VREOF). These companies have the cash to sustain operations for just three to four months. Acreage Holdings (ACRGF) is no better off either. With no big lines of credit, many cannabis companies may go under in 2020.
Retail investors may choose stocks like CRON, OGI, and CGC in this Christmas season. GTBIF may also be a good investment during the Santa Clause rally.