Pot Stocks Down But Investor Confidence Up

Cannabis stock investors have been singing the blues lately, but some savvy investors have been humming a more upbeat tune.

Despite a bear market that’s seen the average cannabis stock lose about half its value since March 2019, 79 percent of Canadians and 74 percent of Americans still find the industry appealing, according to a new survey of 660 retail investors with at least $250,000 in investable assets.

The survey was commissioned by US-based omnichannel cannabis platform ManifestSeven and conducted by FTI Consulting Inc. It found that 90 percent of Americans and 82 percent of Canadians who are currently invested in cannabis believe they’re “completely on track” to achieve their financial goals despite the recent slump in markets.

Interest in the industry was highest among millennials, at 92 percent in Canada and 85 percent in the US, then drops significantly among those age 55 and older, to 59 percent in Canada and 48 percent in the US.

So it’s is not all rainbows and unicorns.

Almost exactly a year ago, a small Canadian cannabis company was generating a lot of buzz (pardon the pun now for about the 23rd time). Despite piddly quarterly revenue of US$9.7 million, Tilray Inc.’s (TLRY) market cap got so high (whoops, promise I’ll stop) that it briefly eclipsed that of major companies people have actually heard of, such as American Airlines Group Inc.

So this dampened enthusiasm for pot stocks does not necessarily reflect fading prospects for the marijuana market, which still has promise. Instead, it is related to short-term challenges associated with a bumpy rollout of legal marijuana in Canada, which are making it hard for winners to quickly emerge.

A year ago, Canada became only the second country to legalize recreational cannabis. But it’s still not particularly easy for Canadian consumers to get their hands on cannabis, as the pace of dispensary openings has been slow.

Meanwhile, average prices for legal cannabis remain well above prices on the illegal market. If the legal product is still inconvenient to buy, and if the illegal product is cheaper, then it follows that dispensary sales of cannabis haven’t exactly soared yet.

In this fast-evolving, Wild Wild West of a market, some industry heavyweights have ended up disappointing investors with their recent sales or profitability figures. Aurora Cannabis Inc. (TWEED), for one, said in May it was on track to achieve growth in adjusted earnings before interest, taxes, depreciation and amortization in the fourth quarter. When it reported results in September – soon after its firing of Bruce Linton – the Company said it had failed to meet this target, citing “challenges at the retail level” that were “beyond its control.”

As a result, the black market continues to thrive.

Since legalization, illegal prices have fallen 12 percent and legal prices have gained about five percent, even with the third quarter’s decline. The price gap has allowed the black market to retain a robust share of Canada’s cannabis market, with 42 percent of cannabis consumers saying they purchased at least some of their pot from illegal sources in the second quarter.

Undervalued and undersold are the catchphrases for 2019. And retail investors may find the bargain hunting more plentiful than anticipated much earlier this year.