2019 saw cannabis stocks plummet, with the likes of Aurora Cannabis and Canopy Group's share price in freefall. Will 2020 see a rally or has the sector fizzled out?
It's no overstatement to say 2019 was terrible for Canada's cannabis companies. Over the course of the year, Tilray’s share price fell 76%, Aurora Cannabis stock slumped 62%, and Canopy Growth dropped 26%.
ETFs that track the cannabis sector showed the extent of the damage. The ETFMG Alternative Harvest ETF fell 35% in 2019, while The Cannabis ETF [THCX], which only started in July, dropped 45%.
Regulatory issues, overvalued share prices and disappointing earnings all weighed on a sector that had been red hot the year before.
Tilray share price performance in 2019
Yet on New Year’s Eve, investors suddenly returned to cannabis stocks. Edmonton-based Aurora Cannabis's share price jumped 12.5% on New Year's Eve on news that Chief Corporate Officer Cam Battley is to step down. Over in Ontario, Canopy Growth saw its share price spike 11.9% and Toronto’s Tilray saw its stock gain 9%.
Why 2019 was so bad for cannabis stocks
Going into 2019, it seemed that there was an unstoppable momentum behind cannabis stocks.
Investors had been expecting a bonanza in cannabis sales in Canada and abroad. Instead, problems expanding into the US triggered a fire sale.
Only 11 US states approved cannabis for recreational use. Major markets, including New York and New Jersey are yet to legalise cannabis. As state-by-state approval drags on, investors have dumped stocks fearing that hyper expansion would be slow coming.
|Aurora Cannabis||Canopy Growth|
|PE ratio (TTM)||8.84|
|Return on Equity (TTM)||-8.83%||-51.03%|
Aurora & Canopy Growth share price vitals, Yahoo finance, 6 January 2019
Cannabis stocks are also difficult to trade in the US. Under US Federal law, the drug is still illegal. Many US brokers simply refuse to sell cannabis shares to retail clients.
Even in Canada the sector has been hit by health concerns over vaping and a lack of retail space.
Cannabis stocks in 2020
Back in November, Bank of America upgraded its rating on Aurora Cannabis to buy. The thinking here is that with Aurora's share price tanking last year it is now trading at a fairer price. An argument that could apply to the whole sector.
Al Foreman, chief investment officer of Tuatara Capital, a private equity firm specialising in cannabis stocks, takes a similar view:
“I think the market correction that we’re seeing is really a reflection of the market having gone too far, too fast with respect to rosy, blue-sky optimism."
Foreman equates the industry with the early tech sector. Start-ups that drove the sector in its early days are now coming up against regulatory roadblocks, with investors losing interest as a result.
“I think the market correction that we’re seeing is really a reflection of the market having gone too far, too fast with respect to rosy, blue-sky optimism.” - Al Foreman, chief investment officer of Tuatara Capital
Yet, one reason for optimism is new legalisation paving the way for Cannabis 2.0 products. Since 16 December, Canadian cannabis companies have been able to ship cannabis-derivatives such as edibles. Ernst and Young thinks these products could attract 1.5 million new customers to the market.
The sector is also ramping up efforts to crack the US. Last year, the cannabis-industry spent $3.8 million lobbying in Washington for the 9 months up to September. This was up from $2.8 million for the entirety of 2018.
Analyst expectations for pot stocks in 2020
Despite the New Year’s Eve surge, Jefferies isn't convinced about the future of Aurora Cannabis. Following news of Cam Battley’s dismissal, the investment bank downgraded the stock from Buy to Hold.
Jefferies analyst Owen Bennett lowered his price target to C$3.00 ($2.28) from C$7.00, saying the departure would not change market conviction.
Fellow cannabis company Canopy Growth carries an average 12-month price target of $27. This would see a 5.6% upside on the current share price. Rival Tilray has a $26 average price target, which would represent a far more substantial 68.3% upside.
Toronto-based Cronos Group has an average $13.81 price target from the three analysts tracking the stock on the Financial Times. Hitting this would represent a 53.8% upside.
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