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Industry Spotlight

Cannabis stocks: is Tilray’s share price set to soar?

Along with other cannabis stocks, Tilray had seen a brief share price rally amid the pandemic chaos. Will share prices for this and other cannabis stocks push higher after a dismal start to the year?

Cannabis company Tilray [TLRY] had a bad year in 2019. The stock, which started the year high, achieving a peak of $100.15 in mid-January last year crashed out to end the year around $17. The story was not much better for Tilray’s share price in 2020, which slid through the early months to suffer a drop again in March. By the end of the first quarter, it was down 59.8% after dipping as low as $3 last month. 

 

 

Tilray was not the only share price suffering. When the cannabis bubble burst in the second half of last year, many cannabis stocks found their share prices tumbling. The ETFMG Alternative Harvest ETF [MJ] slid from a peak of $36.82 in March last year to just around just $9 the same time this year.

Aurora’s [ACB] share price has crashed from $9 last April to just $0.80 today, with Aphria [APHA] down from $10 in April 2019 to $2.80 today. Meanwhile, Canopy Growth [CGC] has slid from $42 last April to around $10 in mid-March and is now at $13.25. 

Adding to the sector’s woes, the coronavirus pandemic has battered markets around the globe. However, this has had a surprising effect on cannabis companies’ share prices. The global lockdown has driven a 50% growth in recreational sales in some key US markets between 16 and 22 March, and a 41% growth in medical sales, according to Cannabis Health Insider

50%

Growth of recreational cannabis sales due to coronavirus lockdown

 

This has been boosted by the fact that cannabis use in some regions and states of both the US and Canada has been deemed essential for either medicinal or recreational use during the pandemic. In Michigan, cannabis can be delivered direct to someone’s home, while in British Columbia you can get it via click-and-collect.

 

What happened in 2019?

“There was a lack of retail stores in Canada and issues with distribution. As such given the worse than expected performances there was relatively little new money prepared to come in and provide the support for the stocks,” Nick Kovacevich, chief executive of ancillary device maker KushCo Holdings, tells Opto, recalling a dampening in investor interest and a lack of capital for firms to push on with. 

Meanwhile, there are other barriers. “There also hasn’t been the US federal reform for cannabis which would make it safer for institutional investors and venture capitalists to come on board. That timeline has been pushed out,” explains.

“There also hasn’t been the US federal reform for cannabis which would make it safer for institutional investors and venture capitalists to come on board. That timeline has been pushed out” - Nick Kovacevich, chief executive of ancillary device maker KushCo Holdings

Such reform would make it easier for cannabis stocks to make use of basic banking and financial services in the US and for the product to be legalised at a federal level. 

There was, however, an unexpected side-effect of the black market vape crisis that hit the US last year and resulted in users ending up with severe respiratory illnesses also affected the industry’s reputation. 

“What this did do was to lift sales of cannabis product from the black market to legal stores state by state. Especially in the US we have seen a rise in demand further increasing during the pandemic lockdown as people work remotely from home,” Kovacevich says.

“However, the vape issue and coronavirus capital squeeze also added to the reduction in stock prices because it further concerned investors. So, we have this disconnect of rising sales and falling share prices,” he adds.

“However, the vape issue and coronavirus capital squeeze also added to the reduction in stock prices because it further concerned investors. So, we have this disconnect of rising sales and falling share prices” - Nick Kovacevich

Holding steady

Tilray is currently a hold among 20 Wall Street analysts, which point to a more than 327% upside based on a 12-month price target of $25.93, according to MarketBeat. In terms of other winning stocks, Canopy Growth — with backing from investor Constellation Brands [STZ] — has started an e-commerce platform for customers across Canada and is set to benefit from its introduction of cannabis-infused beverages. 

Kovacevich says its $90.4m equity offering and release of 11 million shares from a lock-up agreement might affect its price going forward but is a clear “name to watch”. 

Innovative Industrial Properties [IIPR] has also been tipped to do well with its share price, holding up slightly better than its peers only sliding from $80 last April to $70 today. Four of five analysts polled by CNN gave have rated the stock a buy, with a median 12-month price target of $95.

The company buys cannabis company assets and leases them back freeing up cash for operational expansion. As of 26 February this year, it owned 51 properties covering 3.2 million square feet of rentable space. 

Kovacevich also likes the strong balance sheets of Aphria and Curaleaf [CURLF]. “Investors want companies producing profits and with significant size and scale when investment capital is scarce,” he says. Analysts rate the former, with 8 of 13 giving it a buy rating, according to CNN, while four have it down as a hold.

The industry as a whole has strong long-term prospects, according to Arcview Market Research and BDS Analytics, with global legal cannabis spending set to rise from $14.9bn in 2019 to $42.7bn by 2024. Cannabis stocks are heading higher. 

Then there is the recent boost.

“Being deemed essential is pivotal because most industries such as travel and retail have completely shut down. But cannabis is open and changing people’s perceptions [of] both users and investors,” Kovacevich says. At some point, he believes “smart money” will seek out the cheaper cannabis stocks.

“Over the long term, we need to see continued performance and federal reform and clarity. The coronavirus could accelerate that because authorities shelling out money for businesses and the unemployed need to replenish funds. 

“Over the long term, we need to see continued performance and federal reform and clarity. The coronavirus could accelerate that because authorities shelling out money for businesses and the unemployed need to replenish funds” - Nick Kovacevich

“Cannabis firms are among the highest-taxed industries and one of the largest domestic manual job creators. If you legalised it then you would make jobs and increase tax revenues and attract more investment capital. Things are turning for this industry,” says Kovacevich.

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

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