Market Correction Sends Cannabis Stocks Down

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.

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.