During afternoon trade on Wednesday, Cannabis stocks trimmed losses when reports found that American citizens are in favor of drug decriminalization.
The report released by the Cato Institute indicated that over 55% of the adults surveyed wanted drug-related offenses to be treated as civil suits. The Cato Institute is a libertarian think tank, and their survey polled 1,700 individuals. A majority of them want jail time to be removed for drug-related offenses.
Cannabis legalization has seen widespread support while there is no support for comprehensive drug policy.
The markets have been grappling the fear of an oncoming recession and have witnessed heavy selling. Dow Jones Industrial Average DJIA lost 500 points while the S&P US SPX was down 2%.
Exchange-traded fund Horizons Marijuana Life Sciences recovered by 1.6% after this announcement. Twenty-four constituent stocks traded higher as well. Alternative Harvest ETF didn’t show any significant movement. Trading sessions had witnessed ETFs falling consecutively for four sessions.
Korey Bauer, who is a portfolio manager at Cannabis Growth mutual fund CANNX, commented that a select group of cannabis stocks from companies had attractive valuations. He cautioned that the investors should be selective in choosing this sector at present.
The United States is dealing with a widespread crisis relating to lung-damage and vaping of cannabis oils. With many people falling sick across the country, they are facing great difficulty in getting access to capital.
Bauer said that retail investors had been the demand drivers for the industry.
Early during the trading session, large licensed Canadian players dropped, causing pressure on the indices. An analyst commented that the earning forecasts have been unrealistic. They cautioned investors to brace for worse news.
MKM analyst Bill Kirk gave his forecast about the time when these companies would post a positive EBITDA, which is a measure of a business’ earnings after deducting all operational expenditure. Businesses pay interest and tax and account for depreciation and amortization to arrive at the final net profit.
Kirk commented that market leader Canopy Growth is expected to remain EBITDA negative till the first quarter of 2022, which is one year later than the projections. Another big player, Aurora Cannabis, would reach a positive EBITDA in the first quarter of 2021 as against a forecast of Q3 2020.
Hexo Corp‘s timeline for positive EBITDA is Q2 2020, which is in line with expectations. This is not the case with Tilray, which has a consensus for Q1 2021, but in reality, it could be Q1 2022.
Buying numbers indicated by Aurora for July and August showed a slowdown. Indications of new retail locations being opened up are less. Experts believe that the next quarter would not show a meaningful increase in net sales.
Increasing costs, if not accompanied by an increase in revenue, lead to disappointing profit numbers, which would further harm the stock of these companies.
The wholesale market hasn’t been impacted by the lung-related illnesses rampant in the entire United States. Sales of the raw flower have seen positive growth in many provinces.