RE:A long needed haircut this week in the MJ spaceI agree that $5 is not that far off even without any positive news. Of all the Canadian cannabis stocks, it looked like THCX dropped the least (less than 5% yesterday) and Cronos dropped the most at almost 20%. THCX almost dropped the least on Thursday, and this is not coincidence. It means there are less desperate sellers and more buyers and those holding onto THCX are expecting it to skyrocket faster than its peers.
Canopy and Aurora IMO are still over-valued so there might be another modest correction (not as bad as the last two days) on Monday. Then cannabis stocks will likely remain static for a 1-2 weeks in terms of price before there are any significant movement. Because some stocks have high valuations, these stocks have been coming down harder during the recent correction phase. I’m sure investors are thinking carefully which cannabis stocks are considered the most undervalued and have the most potential growth at this moment, and THCX is definitely one of the stocks.
If you think the correction phase is over, I think you’re wrong. There will be another correction within the next couple of months but it will not affect all cannabis stocks. Cannabis stocks that are not able to secure any deals with the provinces will suffer greatly. Again, such stocks could be the ultra small players or the mid to big players that failed to live up to its hype. I cannot predict which companies will not get any deals but it is easier to predict which ones will, and such stocks IMO are THCX, WEED, and APH since they have strong upcoming production capacities, well financed, and have low production costs.
Being a low cost producer is a key cos around half of the margins is given to to retail operations. If cannabis is to be sold at $8, wholesale price to retail distribution is around $4 so the cannabis companies need to bring their cost down to below $2 in order to show a reasonable profit. But the $8 price is only the beginning. Once market is saturated with more cannabis and cannabis is no longer in undersupply mode, prices will need to be competitive with black market and overall market so prices will drop. Within two years after legalization, I’m not surprised to see cannabis sold at $8 will drop down to $5. This price drop will help to eliminate the black market and to be honest, only companies that have strong cost improvement initiatives and very low cost production will survive. Economies of scale is also one of the methods to achieve the low production cost but it is not guaranteed unless the companies have a good workforce and quality systems. At $5 per gram, it means the wholesale price will be at $2.50 so companies that cannot continue to show good profits will be pushed out of the game. Production cost really need to be below $1 at this point. How many cannabis stocks can show production cost of less than a buck per gram at this point? If it can find one now, keep them cos chances are that their production costs will continue to drop over the next couple of years and they’ll be making even more profit.