What happened to Cannabis stocks as their ETFs sink?

By:
on Apr 5, 2023
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  • Cannabis stocks have been in a steep sell-off in the past few months.
  • Pot ETFs like POTX and MSOS are trading at their all-time low.
  • There are concerns about the industry growth and increasing losses.

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Cannabis stocks have been in a major sell-off in the past few months as concerns about the industry remain. The closely-watched AdvisorShares Pure US Cannabis ETF (MSOS) was trading at $5.32 on Tuesday, its lowest level on record. It has dropped by over 90% from its all-time high.

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The same is true with the Global X Cannabis ETF (POTX), whose stock was trading at an all-time low of $8.82. It has crashed by over 90% from its all-time high. Even some of the best-known brands in the industry like Tilray Brands, Canopy Growth, and Cronos have seen their shares plummet by over 90% from their all-time highs.

MSOS vs POTX ETFs
MSOS vs POTX ETFs

Slow growth and regulatory concerns

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Cannabis stocks were among the best performers during their peak. Investors cheered the growing industry and invested in companies that were set to havea strong market share in the sector. Most investors cheered highly optimistic numbers about the growing industry. 

For example, a report by Grandview Research estimated that the industry was valued at $16.7 billion in 2021 and that it would have a CAGR rate of 25.3% between 2023 and 2030. By that time, the industry was estimated to have over $102 billion in revenue. At Invezz, we also published a list of the best cannabis stocks to invest in. 

However, the industry has been underwhelming, with most stocks falling by double-digits this year.. There are three main reasons for this. 

First, most companies in the sector have continued accumulating huge losses in the past few years. Tilray has lost over $532 million in the trailing twelve months while Canopy Growth lost over $2 billion in the same period. Cronos Group lost more than $168 million. Therefore, with interest rates rising, investing in nprofitable companies has been a bit risky.

Marijuana regulatory concerns

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Third, there are regulatory concerns about the industry, with a gridlock continuing in Washington. While Biden signed a marijuana bill into law, it did not go far enough to make it legal in the US. Instead, the bill focused on medical research. As a result, marijuana is still illegal in a number of states in the US.

Most importantly, cannabis stocks have dropped because of the challenges of thematic investing. In most periods, investors tend to jump into emerging themes and then dump their shares. Most recently, we have seen many AI stocks like C3.ai tumble even after the success of Chat GPT. 

Similarly, many EV companies that did well a while back like Rivian and Lucid have all pulled back. The same happened in the crypto industry as the metaverse became a major theme in the sector. Today, many metaverse tokens like Axie Infinity, Smooth Love Potion, and Sandbox have fallen by over 80% from their peak.

Will cannabis stocks recover

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Cannabis stocks have become dirt cheap in the past few months, with most of them trading at their record low. This does not make them valuable investments considering that the industry is slowing and most companies are still making substantial losses. 

Also, with interest rates at an elevated level, some of these companies will struggle to find financing. Tilray recently issued shares to boost its balance sheet. Some analysts caution that many cannabis stocks will likely go to zero in the long-term.

However, there is a possibility that many of these stocks are about to bottom consideringt that their negatives have been priced in. Therefore, focus will be in the upcoming earning season where companies will provide an update about their numbers. Tilray will publish its earnings on Monday next week while Canopy Growth will publish in May.

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