The legal marijuana industry is the “green rush” and there’s a good reason for that alias—marijuana stock investors are making incredible profits from the industry. Over the past year, plenty pot stocks, more than the amount that has been envisaged, have doubled or tripled in valuations. The market forces that facilitated this bullish trend are a combination of legal sales growth potential and a constant shift in the way cannabis is viewed by the public. Forecasts have been made by a cannabis research firm, ArcView, which predicts that the United States and Canada cannabis industry would see an annual growth rate of 26% through 2021. If this prediction becomes manifest, pot industry in North America will be worth $22 billion by 2021. In terms of sales, that is an increase by almost 200 percent from $6.9 billion in 2016. Taking into account that sales worth approximately $46.4 billion were still carried out on the black market last year, there’s a lot of prospect for legal expansion throughout the cannabis industry in North America.
29 states have legalized medical cannabis in the U.S., and eight other states have also given the green light to recreational marijuana. However, the drug remains a Schedule I substance under federal law. The implication is that the federal government does not recognize that cannabis has health benefits, and is completely illegal just like every other prohibited substance. The situation poses a great challenge to the U.S. market, causing the industry leaders to leverage on Canada’s marijuana stocks.
In Canada, medical cannabis has been legal since 2001 and the industry has been growing at an incredibly fast pace. Investors have benefited a lot from it. And now, Canada is deliberating on the legalization of recreational weed by July 2018. This, as believed, would create a channel for a ton of fresh demand. But there was an unprecedented occurrence in the Canadian marijuana market on the 31st of last month. A wave of ‘panic selling’ had hit Canadian pot stocks as people fear a monumental crash in the prices of pot stocks. This action, however, catalyzes the Canadian pot stocks devaluation. The selling pressure sent United States and Canada markets sinking on the 1st of February, and has carried over to global stocks. That could be confirmed by market trends in Asia and Europe as they posted losses too.
As Canadian medical marijuana stocks fall from their record highs, analysts say the instability could diminish the interest for mergers and acquisitions, and impact the access to blazing capital markets for some companies—at least, until some stability is seen. Cannabis stocks plummeted in the last week of January 2018 as “panic selling” hit the stocks of Canada’s burgeoning marijuana industry. Investors are wary of the rapidly increasing share prices and also fear that companies are being overvalued.
Since peaking in the first week of January, the Canadian Marijuana Index (representing 24 leading cannabis stocks) has toppled 35%, wiping out 7 billion Canadian dollars ($5.6 billion) in market cap. Many investors who got in the last month are already preparing for big losses. Some of the biggest losers are Canopy Growth (TSX: WEED), down 44%; Aphria (TSX: APH), down 43%, and Cronos Group (TSX: MJN), down 52%.
The downward thrust happens after some market leaders more than doubled in value since November amid hopefulness that pot will be legalized in Canada this year. A series of mergers followed as companies scurry for market share, and enough supply to fill provincial retail shelves. In January, Aurora Cannabis agreed to acquire CanniMed Therapeutics Inc. in a $1.23 billion deal. That is apparently, the largest merger ever in the blooming cannabis industry.
Chris Damas, editor of the BCMI Cannabis Report said “Stocks are in bear market territory…people are panicking because they are losing their money.” He was also reported saying that the current cannabis meltdown is no surprise.
Some analysts have however warned against ‘panic selling”. Fears that companies are overvalued initiated the decline, but they projected that while some periphery pot stocks may not survive the meltdown in the long term, and that Canada’s demand is sufficient for industry leaders to thrive, if channeled through a legalized market.
Khurram Malik, a partner with Jacob Capital Management which is a Toronto-based financial advisory firm believes that the pullback is “perfectly healthy” given that the index had risen 380% since Sept. 1. 2017. “Stocks are coming back to Earth after a very unusual spike in December… They had no business being where they were and now they’re coming back to more reasonable levels,” he said.
Damas warned retail investors against “panic selling” and advised them to reassess their risk profile and be aware that there’s nothing mysterious about cannabis. The Canadian pot stocks will likely stabilize and prizes will normalize from there.