Finance

Why investors should not write off cannabis stocks yet

Following last year’s hype over cannabis companies, many industry representatives underperformed significantly in 2019. But experts predict a bounceback thanks to new market conditions and companies like GreenStar Biosciences Corp. (CSE: GSTR)

The legalization of cannabis in Canada last year attracted many new investors. Industry representatives such as Aurora Cannabis, Canopy Growth, Tilray and Cronos were among the most hyped stocks in this segment and have encouraged many investors to buy in the hope of a huge growth market. But in 2019, enthusiasm waned noticeably: Aurora cannabis has lost more than half its value since highs in October 2018.

Canopy has seen a similar decline since then, with Tilray shares losing almost 90 per cent since their highs in autumn 2018. For Cronos, the price slide started somewhat delayed – but since the February highs, it has also fallen by a whopping 50 percent.

Should investors pull the ripcord now?

The weak performance of cannabis stocks, especially in the last six months, has made many investors nervous. The fear of a fundamental overvaluation in the market spread, doubts about the expensive growth ambitions of the companies combined with possibly worse than expected demand increased.

However, many experts warn that cannabis stocks are already dead. In their opinion, there are still indications that the industry has potential for the future.

Cannabis friendly legalisation in more and more countries

First of all, there are the ongoing efforts at legalisation on a global level. In many countries cannabis products are now released for medical purposes, in many others the legalisation discussion or at least a corresponding discussion at country level is in full swing.

The USA in particular, one of the markets with the greatest growth potential, is likely to be closely monitored in this context. Cannabis is still illegal at the federal level, but many states have already enforced legalization. President Donald Trump has not put the issue on his list of priorities, so regulatory clarity is not to be expected in the short term. But in the United States, presidential elections are scheduled for 2020, and Donald Trump has already made it clear that he is aiming for a second term in office.

Depending on how the other presidential candidates position themselves, Trump may also be forced to make the issue of cannabis legalization a federal election campaign topic – possibly a release of the green herb across the United States could come sooner than many observers currently suspect – especially in the area of medical cannabis.

Cannabis products are becoming more diverse

But medical cannabis is just a drop in the ocean, considering the potential of other cannabis products. In anticipation of a possible explosion in demand, the beverage giant Constellation Brands secured an early share of the cannabis market leader Canopy Growth. The minority stake in the Canadian cannabis company has not yet paid off for the Americans; the world’s largest cannabis producer has recently reported a loss in the billions and also remained below the market’s sales expectations.

But Constellation hopes that an expansion of the Canopy product range will put the company on the road to success. In mid-October, the legalization of edible cannabis products is expected to be completed in Canada – according to Canopy, it has prepared for this with a strong product pipeline that includes chocolate as well as beverages and intends to conquer the market this year.

Many experts also expect the cosmetics industry to become increasingly interesting for cannabis companies. There are already numerous products on the market that are enriched with the green herb – here, too, cannabis producers have a potential market worth billions.

Will the figures improve?

With an increase in potential markets and an expansion of the product range, the recently weak balance sheet figures of cannabis producers are likely to look better again – especially among companies that are broadly based and have financially strong partners behind them.

Also worth a look are shares in companies in the industry that have established themselves in niches such as GreenStar Biosciences Corp. (CSE: GSTR) which is well on the way to become a dominant cannabis stock. The company’s focus is on building a diverse portfolio of cannabis companies specializing in all aspects of production cycle: seed, processing, packaging, distribution.

GreenStar has an experienced management team with expertise in Canadian cannabis market which they use to identify and guide local competitors to success. Their first tenant partner company Cowlitz recorded an impressive revenue of $14.6 million at the end of last year in just five years of operations. Greenstar is an attractive option for investors because with just one stock they can access top most promising North American cannabis companies.

Despite the recent weak share price development in large parts of the sector, many experts continue to see cannabis shares as an interesting investment field. With increasing legalization efforts and a broader product range, or a focus on a particular segment, cannabis stocks could leave their lows behind and perhaps take off to new heights.

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