Cannabis Market Update: Q3 2022 in Review

Cannabis market update: Stocks affected by broader conditions

The cannabis stock market hasn’t been kind to investors throughout 2022. Although many experts remain positive about the long-term outlook for the space, cannabis hasn't been immune to poor economic conditions.

In a commentary note to investors, the managers of the Purpose Marijuana Opportunities Fund (NEO:MJJ) indicated that a “re-pricing” for cannabis multiples could be coming.

“The Fed’s connection to cannabis is very real; the industry is still in growth mode, and future growth has now become more expensive in addition to the consumer becoming slightly weaker on the back of continuing inflation,” said the Purpose Investments duo of Greg Taylor, chief investment officer, and Nawan Butt, portfolio manager.

The movement among cannabis stocks can also be traced to the sentiment surrounding US reform. The team at Ninepoint Partners pointed to the “sharp” movement seen from cannabis stocks amid speculation about potential US regulation changes.

“These stocks are like tightly coiled springs, ready to jump on even marginally good news,” the fund managers said in a July note.

Cannabis market update: Biden’s pardons spark talk about rule changes

While cannabis policy remains in question at the country level in the US, the entire market received a lifeline of supply thanks to US President Joe Biden's decision to pardon people charged federally with cannabis possession.

The move was a victory for the entire cannabis cause, but it also brought forward a glimmer of hope about the key changes industry participants are desperately asking for.

Alongside the pardon came the revelation that Biden has tasked the Department of Health and Human Services, along with Attorney General Merrick Garland, with reviewing the scheduling of cannabis in the US.

Even so, right now any projected timeline for when changes could be on the way is just that: projected. If recent history has anything to teach cannabis investors, it's that patience is a virtue and that the political path of cannabis rules can’t be predicted.

“While the US appears to be on the path to eventual federal cannabis reform, exact timing remains unclear,” the team at Ninepoint Partners told investors in a note covering the month of August.

Cannabis market update: Canadian companies call for government help

Financial analysts across the board continue to emphasize that the Canadian market is struggling within the larger cannabis space.

While many of its ailments fall squarely on the shoulders of the publicly traded producers that spearheaded the launch of adult-use legalization in Canada, the industry is asking for help from the government to change its rules.

Over the summer, the cannabis team at EY issued a report indicating the biggest places where the Canadian government could come in and immediately add to the industry.

The business advisory firm came to the conclusion that the Canadian market is struggling with current packaging and marketing regulations. But primarily the tax breakdown on cannabis products may be too harsh.

One announcement that demonstrably exemplifies how quickly things have changed in the Canadian landscape was the decision by multi-faceted producer Canopy Growth (NASDAQ:CGC,TSX:WEED) to divest its retail assets.

The operator confirmed the sale at the end of September to OEG Retail Cannabis, and Canopy Growth CEO David Klein said the goal is to prioritize the company’s brand-focused consumer packaged goods strategy. This move ended Canopy Growth's deal with Alimentation Couche-Tard (TSX:ATD.A) for brick-and-mortar stores in Ontario.

According to BNN Bloomberg, Canaccord Genuity analyst Matt Bottomley estimates that Canopy received C$20 million from the divestiture. Back in 2018, Canopy paid C$600 million for Hiku Brands, the parent company of cannabis retailer Tokyo Smoke.

Similar to Canopy, several other producers have continued to struggle throughout the Q3 period in 2022.

“We don’t have an appetite, we don’t know many people that have an appetite. I think they are flawed business models for the most part,” Matt Hawkins, founder and managing principal of Entourage Effect Capital, told INN.

For those watching the space, this isn't news — Canada has not been any financial expert’s preferred cannabis market for awhile.

In their commentary note, the team at Ninepoint Partners highlighted the current harsh reality of the Canadian landscape.

“Canadian market dynamics are challenged in that more stores continue to open, yet the average sales per store continues to come down,” they said in a note for the month of August.

“We are on the sidelines when it comes to the Canadian market,” they added.

Given the current marketing restrictions in Canada, “distribution networks are being established based on price and product format only,” leading to a clear lack of support for products from retailers and producers, according to Ninepoint Partners.

“We’re just not spending any time in Canada. I hate to be harsh to our friendly neighbors to the North, but it’s just a tough market,” Hawkins said.

Cannabis market update: Investor takeaway

The cannabis industry finds itself in a precarious position. Although regulatory changes in the US are anticipated, it's unclear when they may come, and right now the market is having to contend with tough financials and diminished results across the board.

For investors, it’s been difficult to even catch a glimmer of the positive long-term outlook. But it’s clear experts are pointing to the future as a way to continue preaching patience in the market.

“We are closely watching for next steps, but are optimistic that those who have long endured the pain of the cannabis trade will soon see the bigger thesis come to life,” Butt said.