Cannabis stocks have had a pretty rough ride over the past few months, at a time where expectations were much higher. Two key earnings announcements are set to tell us more.
Legal cannabis and legal cannabis producers are seen by a lot of investors as a pretty hot sector, at least in terms of potential. It does present an opportunity for people to get in on the ground floor of a new and exciting industry.
Emerging sectors do require a fair bit of patience at times though, and the cannabis industry is turning out to be no exception, and perhaps requires those investors who have already become involved in cannabis stocks to be particularly tolerant.
The Canadian market finally opened up last October 17, with much fanfare. The lineups at the many stores in Canada selling recreational weed were very long indeed when this all started, spilling well over into parking lots and requiring people to brave the cool Canadian fall weather for extended periods for the privilege of being one of the first people to buy legal weed in the country.
It wasn’t long before the supply problems that have been plaguing this new industry started to rear its ugly head. Many products quickly sold out as the stores did not really prepare for the initial demand. Some stores had to close completely for a time.
Four months later, the lineups are long gone, and things have settled in a lot more, as the novelty of the experience wore down and people stocked up more. As it turned out, the cannabis industry in Canada, mostly government run stores, may have underestimated the initial peak demand, but they have over-forecasted demand beyond the first week or two, where sales have failed to reach predicted targets thus far.
At least some of this appears to be from being overly optimistic at how much legalization would grow the cannabis market in Canada, over and above what used to be sold on the black market when people risked criminal prosecution for purchasing it. Legal pot does appear to be here to stay though and the outlook for the industry over the longer-term remains positive.
Current Canadian Prime Minister Justin Trudeau and his Liberal Party made marijuana legalization a major plank in the platform that got them elected in 2015. While the country will be having another election soon, where there is a risk in theory that the Conservative Party may come out on top this time around and repeal legalization, as they still oppose it, even the Conservatives admit that the horse has left the barn and that we are probably past the point where reversing this is realistic.
The Struggles of the Cannabis Industry
As for the cannabis companies, it generally is a good thing when supply has never really been able to quite keep up with demand, with supply falling well short of demand initially and still being behind as demand has waned, because this may mean you are moving as much product as you can produce and this is not enough.
This is only true though if there are no supply bottlenecks, and this is the main reason that cannabis companies use to explain their struggles.
Financial results from the cannabis industry have not been very good at all. The industry itself has struggled, and we’re not talking about growth slowing down, we’re seeing real red ink on display here. Companies that are losing money better have bright prospects, although losing money will dull any shine people are seeing in the foreground.
The government is blaming the cannabis suppliers for their lower than expected sales and for the shortage that is still very much present with a lot of items anyway. The companies are in turn blaming red tape and too many small orders for these issues, and there’s little doubt that the regulatory side of this hasn’t negatively impacted their getting their products to market in a timelier fashion.
When it comes to the stocks, earnings reports tell the real story about how these companies are doing, and getting a good report card here can influence stock prices quite a bit. It’s stock prices that shareholders care about the most, and also tend to move a lot as a herd when it comes to rising or falling stock prices.
The story for cannabis companies since last October has not been a gentle one at all. Cannabis stocks are down between 10-40% since the Canadian market opened, and the breadth of this is very wide. The Cronos Group has been an exception, being bolstered by a further investment of $1.8 billion in their business, but on Friday, their stock lost almost 9%.
Two Earnings Reports That Will Tell Us More
This leads us to believe that the sentiment toward cannabis stocks is further deteriorating, and Friday was not a good day overall for the industry as far as the markets go, with nothing but red ink spread across it.
One day doesn’t tell us that much though, but this is at a time where earnings reports of two of the bigger players are days away. Aurora Cannabis reports theirs after the bell Monday, and Canopy Growth, the world’s biggest cannabis company, checks in after the close Thursday.
Aurora already had to bear the sinking prospects of a company they acquired, which had a bad quarter and has seen its stock decline by 40% lately. The parent company doesn’t seem to be any better off, and the CEO of a rival company has told us to basically expect the worst.
Analysts are predicting a loss of 60 cents a share, on sales of $51.8 million, and the hope is that the damage will be less, although it very well could be more and this would not bode well for the stock in the near term.
With Canopy Growth, analysts see it losing 17 cents a share from revenues of $84.7 million. In spite of projecting losses, nine of the ten analysts who follow the stock have it as a buy, with only one rating it as a sell. The average price target among them would take the stock 17% higher, which also demonstrates considerable optimism.
Still though, when you have negative earnings, that can scare some people out, and we need to make sure that the optimism is high enough to overcome the fear element.
There are indeed reasons to be optimistic as this fledgling industry gets its bearings more and stabilizes itself. This is a market that is expected to expand significantly over the next few years, as more markets open up. However, we also have to deal with the now, and we’ll get some good information on this in these two upcoming earnings announcements.