The cannabis industry is still in its infancy, and there will be some bumps along the way…
Speaking with our members in Las Vegas, many of you talked about how you believed in cannabis stocks in the long term.
However, many of you also rightfully wanted to know when the short-term pain would end.
Outside of geopolitical tensions sending stock prices all over the place, the cannabis industry has had a fair share of issues, challenges, and setbacks.
- The firing of Bruce Linton showed that investors want results now.
- CannTrust Holdings (CSE: TRST) was an example that there are some companies that thought they didn’t have to play by the rules. I don’t expect this to be the last company to get caught up in a scandal. There’s never just one cockroach.
- An issue in the vaping market is getting people sick and some are even dying. While it appears to be issues from the illicit market, states are going as far as to ban all vaping devices.
There’s been a few other issues, but you get the point.
Answering Your Important Questions
I received a question about whether cannabis stock prices will go even lower from where they are right now.
Allan B. asks: “Are we at or near a bottom for the stocks in the Model Portfolio? Or do you expect it to go lower? And is there a catalyst that you think might turn the market higher?”
That’s the biggest question among cannabis executives right now, Allan. We’re not the only ones feeling the pain of these stock declines – the company founders are often the largest shareholders.
They often have big investors as sponsors, and they are bewildered by what is happening in the market.
I have to believe we’re near a bottom, but we might not be quite there yet.
The valuations on these stocks do not encapsulate the growth they are showing. That would make some sense if it were limited to the companies not yet generating significant cash flow, but even companies like Trulieve Cannabis Corp. (CSE: TRUL, OTC: TCNNG), which has been profitable for over two years, are suffering.
Meanwhile, as I’ve written, just about everything the cannabis industry said would happen is happening – especially in the United States.
So, you’re exactly right to ask about a catalyst.
What might those catalysts be?
I think if the Senate passed the SAFE Banking Act that would be the catalyst we need. The House passing the bill was definitely a positive, but it was also widely expected. The Senate is the tougher nut, but I think we could get a positive surprise out of the Senate.
Another major consumer products company investing in the sector, particularly in the U.S., would be a major change that would trigger a run in prices.
Any change which would clear the ability for institutional investors to put money into the sector would certainly be a big catalyst. Cowen Inc. (Nasdaq: COWN) analyst Vivien Azer may have started this when she began covering U.S. companies that deal directly in cannabis.
But the real change will be when some big mutual fund or insurance company reports that it has taken a big position in a large U.S. cannabis company.
That’s another step in the right direction, but if we are really looking for something big, it would be the removal of cannabis from Schedule I of the Controlled Substances Act. That would be an instant catalyst that would propel the sector to new highs almost overnight.
We can’t know when that is going to happen, but it could be sooner than most people think. At the end of May, a federal court ordered the Drug Enforcement Agency (DEA) to reconsider its position on cannabis as a Schedule I drug.
The DEA has no scientific basis to keep cannabis on the Schedule at that level. Politics could prevail here, but if the science wins out or the politics look at the increasing support for legalization, we could see this “largest of all” possible catalyst sooner rather than later.
Thanks again for your question.
Just remember that, as these four charts show, we will face some bumps in the road.
But in the long term, it pays to be a patient investor.
Executive Director, National Institute for Cannabis Investors
6 responses to “This One Event Could Reverse the Trend of Falling Stock Prices”
October 05 2019