uploads/2020/01/cannabis5.jpeg

Raymond James Is Cautiously Optimistic about Cannabis Stocks

By

Updated

So far, cannabis stocks have rebounded in 2020, which investors expected. The marijuana industry struggled in 2019. Earlier, I discussed how a Raymond James analyst thought that the cannabis sector would rebound in 2020. Now, Raymond James thinks that it could take a while for cannabis to rebound.

Article continues below advertisement

Cannabis won’t rebound until Q4

Last month, I discussed Raymond James analyst Rahul Sarugaser’s reasons for a cannabis reversal in 2020. He thinks that Ontario’s new approach for the retail cannabis market will help with cannabis sales and balancing the supply-demand issue. On January 6, a Cantech Letter article discussed Sarugaser’s views on the same. The analyst thinks that cannabis stocks will rebound in 2020, but not until the fourth quarter.

First, it will take time to see the impact of Cannabis 2.0 expansion and sales revenue. Second, opening legal stores will take time. Even though Ontario’s government will allow 20 store licenses to be issued per month, it will take a while for the stores to be set up and start sales. In particular, larger provinces like Ontario were hit by the slower-than-expected rollout of legal cannabis stores. By the end of last year, Ontario had 540,000 people per store, which was challenging, as reported by CanTech Letter.

Article continues below advertisement

Smaller cannabis companies will bite the dust

The Raymond James analyst also discussed how many smaller marijuana companies will probably go bankrupt this year. The oversupply issue last year caused many cannabis companies to lower their prices for wholesale marijuana. For example, Village Farms (VFF) is a small company if you look at market capitalization. Pure SunFarms had to drop its wholesale marijuana prices from $4 per gram in the first quarter of 2019 to $1.00 per gram in the fourth quarter of 2019.

The analyst says that cannabis companies won’t earn revenue from Cannabis 2.0 until the second half of 2020. This is a long period for smaller companies. They need to recover from their losses. As a result, the delay could lead smaller companies to file for bankruptcy.

What about the bigger marijuana players?

Bigger marijuana players are in a little safer position. Aphria (APHA) saw profitability in its last quarter. The company has a strong balance sheet and is in a good cash position. Aphria will be releasing its results for the second quarter of fiscal 2020 today. Similarly, Cronos Group (NASDAQ:CRON) follows an asset-light approach. According to the Raymond James analyst, the approach puts the company in a good position. Canopy Growth (NYSE:CGC) (TSE:WEED) is backed by Constellation Brands. Aurora Cannabis, which has a rising debt burden, has a strong international presence in the medical cannabis market.

Article continues below advertisement

According to the Raymond James analyst, “By 4Q20, we anticipate much of the bloodletting—and resulting attrition of poorer operators —will have run its course. At the very least, we expect a wide, clear divergence to emerge between well-run, well-capitalized, strategically adept operators, and those that are doomed to fail.”

An article in Linchpinseo also discussed how marijuana sales could improve this year even in the US with more states supporting legalization.

How are marijuana stocks trading this month?

Big cannabis players saw a stock price boom after Canada legalized cannabis in 2018. However, the headwinds made their stock values fall by half in 2019. As of January 13, Aurora Cannabis stock has fallen 20.4%. Canopy Growth stock has risen 9.5%, while Aphria has risen 4.4%. Cronos Group has fallen 2.0%, while HEXO has fallen 3.7% YTD. The Horizons Marijuana Life Sciences ETF (TSE:HMMJ) has risen by 1.1% YTD.

There are hopes that marijuana companies can recover from their losses if Cannabis 2.0 sales increase this year. Meanwhile, industry experts also see Cannabis 3.0 on the horizon.

Let’s hope that the marijuana sector shines again in 2020. Stay with us for the latest updates.

Advertisement

More From Market Realist