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Shares prices for leading cannabis companies have been on a steady decline over the last year.

On average, the stock value for the five big players has declined by 67%, leaving some early stage investors with something of a headache. But this may be more of a long term game and one to watch for investors in 2020.

Aurora Cannabis has taken the biggest hit, with its shares falling by 78.73% from February 2019. Tilray has also suffered a significant loss of 77.65% within a year. Cronos Group is the third most hit entity with a loss of about 68.54%.

Elsewhere, Aphria has also been affected by the industry haemorrhaging value, taking a loss of 59.54% followed by Canopy Growth with a 53.71% drop.

The current decline in hemp stocks might not end soon considering that the data indicates a high average monthly volatility rate, according to research from LeanBonds. Aurora Cannabis has the highest volatility rate at 16% followed by Tilray’s rate of 15.18%.

Cannabis stocks: legal grey area?

The decline in cannabis stocks can be attributed to various factors including lack of a clear legal framework. But the industry is also still quite immature. While early adopters may have suffered some substantial losses from marijuana stocks in the last couple of months, further opportunities are likely to emerge in the sector.

The legal uncertainty surrounding cannabis has made it harder for marijuana companies to know how to operate within the law, which could expose them to legal risks. For investors in Europe there are also legal issues to answer.

One approach is to carefully screen stocks in a portfolio and only keep those that are entirely dedicated to the development and/or support of the medicinal cannabis industry. For example, HANetf, which launched Europe’s first cannabis-focused ETF in January (LSE:CBDX), has dropped Namaste Technologies (TSXV:N) following its exclusion from the fund’s underlying Medical Cannabis and Wellness Index.

In this case, the decision was made when Namaste announced that Alberta craft chocolate manufacturer Choklat Inc (in which Namaste holds a 49% position) had received a processing license from Health Canada to produce a range of cannabis-infused chocolate bars, drink mixes and infused sugar.

On the surface of it, this does not seem like a big deal, but the activity meant that Namaste fell outside of the criteria of the index, which has been specifically designed to reassure European investors. It illustrates the complexity of the cannabis market for European traders who are concerned about the legal grey area.

Hemp investment an alternative to cannabis?

Although CBD is now being used to cure conditions such as epilepsy, lung illness-related illness as a result of vaping has also been a major concern.

The legalization of cannabis in the US might be also in sight after the House Judiciary Committee approved the Marijuana Opportunity, Reinvestment, and Expungement (MORE) Act which is the first move towards marijuana decriminalization in the US.

Cannabis is certainly here to stay as both a recreational and medicinal product in the developed world. Ironically it seems as if North America is making more progress in the legalisation of the product than Europe, where many investors still await further guidance from lawmakers, most of whom have been taking somewhat of a hands off approach.

With ongoing uncertainties around which marijuana stocks you can actually invest in, some traders are looking seriously at the hemp market, which is legal under US law. One stock that could benefit from this is Charlotte’s Web Holdings (OTC:CWBHF) which was responsible for kick starting the hemp CBD market in the US several years ago.

Charlotte’s Web has the advantage of being an established name and reported an increase in profits of 42% (year on year) for Q3 2019. It’s products are already on the shelves of more than 9000 retailers in the US.

While recent performance from cannabis stocks has been poor, we anticipate that more medium to long term opportunities will emerge as the industry matures.

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

James Norris

James Norris

James is a highly experienced writer and editor, gained from more than 20 years in the financial services industry, in particular wealth management and asset management.

He initially worked as a financial journalist for a number of leading media brands, including the FT Group, Financial News, Euromoney and Incisive Media, covering most aspects of the asset management industry. More recently, James switched to work as an in-house content specialist for fund management and wealth management groups, including JP Morgan Asset Management, Quilter Cheviot Investment Management, AXA Investment Managers and Invesco Perpetual.

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