On Thursday (February 1) cannabis investors saw their holdings decrease below average as the industry faced a severe drop that could be the start of a larger market correction for the entire cannabis industry.

An index of Canadian cannabis companies showed a total 8.95 percent decrease in company share prices overall while leading companies like Canopy Growth (TSX:WEED), Aurora Cannabis (TSX:ACB) and MedReleaf (TSX:LEAF) all experienced drops of close to or over 10 percent. This decrease was seen throughout the entire public industry.


As investors searched for answers as to the exact reason this dip was taking place, one analyst told the Investing News Network (INN) there was no specific announcement that caused today’s decrease.

Jason Zandberg, special situations analyst with PI Financial said this type of market correcting action is typical for markets where there is a sudden surge in buying.

“Quite honestly there is no real catalyst, it’s just the way of buying and selling that we’ve seen,” Zandberg told INN.

 

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Decrease in share value across the Canadian exchanges

The impact of this dip reached even companies on the Canadian Securities Exchange, a majority of which operate with a clear focus on the US. Cannabis operators like CannaRoyalty (CSE:CRZ), MPX Bioceutical (CSE:MPX), and Friday Night Inc (CSE:TGIF) all saw dips in their share price on Thursday during trading hours.

The leading cannabis exchange-traded fund, the Horizons Marijuana Life Sciences Index ETF (TSX:HMMJ) also suffered a decline from Thursday’s overall decrease. Once the market closed on Thursday, the ETF had dropped by 9.46 percent in value. While the year in just over a month in, the ETF’s share price has decreased marginally by 3.43 percent.

TSX Venture exchange companies like The Supreme Cannabis Company (TSXV:FIRE), The Hydropothecary (TSXV:THCX), Cannabis Wheaton Income (TSXV:CBW) and Organigram Holdings (TSXV:OGI) all saw dips of over 5 percent during Thursday’s trading session.

Zandberg said he doesn’t think this type of trading nature is healthy for the industry with “too much enthusiasm” causing over corrections, which–in the end-affects new investors.

“You tend to have a larger amount of new investors that their first taste of investing in this market is with a significant loss because they get in at the peak,” Zandberg said.

As part of their industry update for the month of January, Canaccord Genuity wrote a report stating despite the recent increases seen in the cannabis market their analysts were worried about the sustainability of these bumps.

“While excitement is clearly building around the pending legalization of recreational cannabis in Canada, we are growing increasingly wary that the fundamentals may not support the rapid share price increases that we have witnessed,” the report co-authored by Matt Bottomley and Neil Maruoka, cannabis analysts with Canaccord Genuity, said.

Analyst recommends second look before buying the dip

When asked how he’s telling investors to respond with this dip today, Zandberg said he’s recommending caution about buying the drop since it’s not known when the correction will stop.

“Be comfortable [that] if you buy today there may be another down day tomorrow and that you are going to be ok with that,” Zandberg said.

A debate has been growing between experts and critics of the industry regarding the potential for an overvaluation on these cannabis stocks. While these companies differ in business approaches, there has been joint growth from regulatory announcements or policy framework being unveiled.

According to Zandberg, 2017 was a year full of run-ups for the industry, causing casual investors to buy in, thinking the gains would continue without any slowdowns.

Using Canopy Growth as an example, Zandberg said they serve as a recognized leader that reached an incredibly high market cap without a total justification for their exponential growth.

“We can look back and we could have market leaders that are beyond $8 billion in market cap but again with the limited information that we know of as of today, it was definitely trading ahead of itself,” Zandberg said.

Investor Takeaway

This market reaction shows how the rapid increase of the cannabis industry could have been running more on promise than results. Zandberg told INN he expects to see more run-ups this year with even larger waves of capital.

Despite Thursday’s market dip, the industry is looking ahead for some catalysts– such as the announcement of an actual legalization date in Canada–to bring the markets back up.

Don’t forget to follow us @INN_Cannabis for real-time news updates!

Editor’s Note: This article was updated to reflect the percentage changes by market closure on Thursday and to include information from a Canaccord Genuity cannabis report.

Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: Friday Night Inc. and The Supreme Cannabis Company are clients of the Investing News Network. This article is not paid-for content.

 

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Cannabis Market Update: Q3 2020 in Review

Click here to read the previous cannabis market update.

During the first few months of investment time in 2021, cannabis faced some volatility alongside optimism about federal changes in the most important market for the drug.

The cannabis business found its stride during Q1 thanks to policy change signals and consolidation.

To find out more, the Investing News Network (INN) asked experts about progress in the market during the first major period of the new year, and which developments investors should watch out for.

 

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Cannabis market update: New York and US potential boost operations

New York state’s legalization of recreational cannabis was a huge Q1 announcement that added pressure to the US federal government when it comes to cannabis policy, said George Mancheril, co-founder and CEO of Bespoke Financial, a debt financing business with a particular focus on servicing cannabis businesses.

“It’s going to add to the chorus of voices in the federal scene to basically move sooner rather than later,” he explained to INN.

Following the US election in 2020, the momentum for cannabis businesses went on the upswing, as did company valuations, with the idea of expansion at the heart of it all, according to Mancheril.

Before starting Bespoke Financial, Mancheril learned from traditional investment banks, working in the lending, fixed income and debt markets with Goldman Sachs (NYSE:GS) and Guggenheim Partners.

Nawan Butt, portfolio manager with Purpose Investments, agrees with Mancheril. The financial expert told INN the ongoing legalization process seen in the US market is leading to expansion.

“It’s becoming more of a national move, then small pockets of proliferation. That’s very exciting about cannabis right now,” said Butt, who co-manages the Purpose Marijuana Opportunities Fund (NEO:MJJ).

This proliferation effect is causing a change in valuations and enthusiasm for US-based operations. Mancheril told INN that by the end of Q1, multi-state operators (MSOs) had raised approximately US$3.3 billion.

The cannabis lender said he sees the industry as having grown from the woes of 2019; it is now undergoing a return to form as excitement about the US opening up increases.

The expert explained that there is likely to be a windfall of capital in the wake of major federal changes in US cannabis policy, although the timeline for these changes is becoming increasingly hard to predict.

Leading up to that capital influx, Mancheril said he wants to see operators really drill down on the value of desired assets and whether they make sense.

“What I’d hope is that we continue to see bullish sentiment, but with some measure of responsibility, and let’s not just get over ahead of ourselves,” Mancheril told INN. “The idea is let’s minimize the volatility and continue growing responsibly.”

 

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As far as struggles go, Butt explained that the cannabis industry has cemented itself as a growth-type sector, and as such there are macro pressures affecting the way these assets operate.

“We’ve seen this preference for cash flows at growth in the current or in the near future, rather than in the far future, and that’s what we’re seeing as far as valuations go in the broad market,” Butt said.

Cannabis market update: Volatility continues to rule as industry foundations build

Despite the industry’s potential and the growing pains it has gone through as a whole in both the US and Canada, volatility remains a key factor in the cannabis investment scene.

Butt explained that the current shareholder base, which is dominated by hedge funds and retail investors, still lacks enough institutional support to avoid the day-to-day volatility cannabis has come to be known for.

These two investor groups, Butt said, can be easily spooked and excited by the news of the day when it comes to their investments.

“A lot of these institutions’ strategies are not about short-term profits, but they’re about long-term sustainability of the businesses themselves,” Butt said.

“That’s why you see a lot of volatility in the space, and that’s essentially what we’ve seen over the past, I’d say, three to two months as well,” he added.

That means investors shouldn’t expect an end to volatility anytime soon.

“It’s not about whether we continue to expect volatility, because we do,” Butt said. “We really think that the volatility will be taken out when the shareholder base becomes more institutional, but it’s really about understanding why there is volatility in the first place.”

Cannabis market update: Canadians talk up US business, but questions remain

A surge of mergers and acquisitions has taken over the Canadian cannabis sector recently as more producers see potential in America.

One of the biggest announcements in this regard came when Organigram Holdings (NASDAQ:OGI,TSX:OGI) secured a C$221 million investment deal from British American Tobacco (NYSE:BTI,LSE:BATS).

Using the funds, the two will work in tandem to develop new branded products designed for the international stage, including in the US. Organigram CEO Greg Engel previously told INN that the US represents a critical opportunity for Canadian companies, but the entry point isn’t as clean as it could be.

 

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While the long-term potential may be exciting for investors, Butt told INN he’s still unsure how the approach will work for Canadian companies.

The Purpose Investments expert said there will be plenty of space for the biggest Canadian names to pursue US market entries, beyond the initial hemp-derived CBD moves some operators have mde, since the US represents the biggest market in the world.

“But there’s just way too many unknowns right now to say exactly what that participation is going to look like, or when that participation will happen,” he said.

“What we do know is that currently the US MSOs are in a wonderful sort of position to expand on their market leadership that they have. And it will be tough for Canadians to come in and compete with them,” Butt said.

Canadian players still retain the upper hand at times in terms of valuation, which is confusing for both Butt and Dan Ahrens, chief operating officer and portfolio manager at AdvisorShares.

“The performance in quarterly earnings of US companies has been rather spectacular. They’ve knocked it out of the park in most instances,” Ahrens told INN.

Butt praised the recent performance reports from MSOs across the board, pointing to year-over-year growth lines and projections for continued positive performance. In his view, share prices still don’t reflect company value. “Those are really being discounted at this point,” Butt told INN.

“We’ve seen the Canadian licensed producers be really hot stock performance-wise, outpacing the US (MSOs), and I’ll say it’s rather nonsensical to me,” said Ahrens, who oversees the AdvisorShares Pure Cannabis ETF (ARCA:YOLO) and the recently launched AdvisorShares Pure US Cannabis ETF (ARCA:MSOS).

Cannabis market update: Investor takeaway

The cannabis investment proposition finds itself at an interesting moment in time, as the entire sector eagerly awaits confirmation in the US at the federal level.

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