1. Surprisingly, Marijuana stocks have had a rough year in 2018. This past year has been groundbreaking in the pot industry. Canada legalized recreational marijuana. Two more U.S. states, Utah and Missouri, legalized medical marijuana and two others, Vermont and Michigan, legalized adult-use recreational marijuana. Despite this growth pot industry, stocks have faltered.
2. Specifically, the Horizons Marijuana Life Sciences ETF, which is the first publicly traded exchange-traded fund (it debuted in 2017), “was down 45% year to date, and has given up better than three-quarters of its gains since inception.”
3. Why have marijuana stocks performed so poorly this year? The following 3 reasons help to explain, in part, why stocks have been underwhelming. First, there has been a shortage of cannabis, for two reasons. 1) Cannabis growers haven’t had time to complete their grow and sell their product; 2) In Canada, there is a lot of red tape surrounding pot production and distribution. Canadian pot growers need a cultivation license, and it is taking a while for the government to keep up with the influx of applications.
4. Second, since about mid-October, investors have been scared away from pot stocks. Earning results weren’t as substantial as expected, and now actual earnings is becoming more important than potential earnings. Specifically, “Seven of Canada’s largest growers combined to lose nearly $300 million in their most recent quarter.”
5. Lastly, not many marijuana stocks “have been able to secure access to nondilutive financing options. The result has been a reliance on bought-deal offerings to raise capital.” Bought-deal offerings can be fine, but they can also weigh on a company’s share price, as well as potentially leading to reduced earnings per share.