In Focus: Weed/Meme Stocks
Meme stocks, Wall Street's new phrase for, "The regular people are beating us." Meme stocks have been deemed those stocks that find popularity among young investors and Reddit users.
After discount brokerages across the world suspended trading on GameStop's stock, and allowed the short sellers who were losing billions to catch their breath, the Reddit army moved on to a new batch of stocks, weed companies.
Over the past two weeks some cannabis related companies have rallied as GameStop winners sought to catch lightning twice by reinvesting their GameStop winnings. The gamble has paid off nicely for investors, while not quite like GameStop, there have been big gains nonetheless.
For those that have not been paying attention, the weed companies have been on the move since the beginning of 2021. Tilray (TLRY) has increased 244% from its opening in 2021 to Friday February 12, 2021. In that same time span Aurora Cannabis (ACB) is up 47%, and Canopy Growth Corporation (CGC) is up 61.7%. Those are significant gains for only being six weeks into the new year.
The gains could have been much bigger for the weed sector, but investors chose to take profits last Wednesday through Friday, resulting in a sharp pull back in Tilray, Aurora, and Canopy. This was to be expected given the current nature of the market. Currently, we're in an investment cycle where it's all about big short-term gains, and then on to the next thing.
Unfortunately for the companies themselves it wasn't just the Robinhood/ Reddit crowd bailing on the stocks that caused the pull back in stock prices, major Wall Street firms bailed as well.
Aurora Cannabis reported what the Street considered to be weak quarterly earnings, C$67.7 million in revenue net of excise taxes and a net loss of C$292.8 million. The sluggish earnings report brought a downgrade from MKM; and Canopy Growth received a downgrade from Benchmark analyst Mike Hickey even though he acknowledged a better than expected quarter for Canopy.
Investors would be wise to not abandon the weed sector entirely, though. This is still a young industry that is tangled in lots of regulatory issues. The industry will mature, and all of the regulatory issues that hold the industry back now won't be there forever.
Getting Past Our Own Storylines
Investors developed a storyline for weed related companies during the pandemic. We believed with people isolated at home and nothing to do, marijuana users recreational and medicinal would use/buy more, resulting in a fortune of revenue and possibly profits for the cannabis companies. What we found out is the pandemic was just as difficult for weed companies to navigate as other companies.
As the pandemic dragged on people's priorities shifted. After realizing the coronavirus wasn't going away in two months, people had to deal with job losses, housing losses, and a lack of stimulus. For people with their backs against the wall financially, supporting their legal weed dealer took a back seat to food, clothing, and overall survival.
In addition the marijuana companies themselves found it difficult to secure the financial aid that was available to other companies. The regulations that were still in place for anything related to the growing, sale, and distribution of marijuana really hurt the industry and it's ability to get financial relief. These regulations hit growers in Oregon twice as hard following the west coast wildfires.
Think Long Term 💡
I have a favorable long-term term bias for the weed industry, and I have found myself embracing the notes from Cantor analyst Pablo Zuanic. Zuanic noted that Aurora Cannabis' revenue was at least better than his company expected and that the EBITDA loss as a percentage of sales improved from -85% in the prior quarter to -25%.
Grandview Research expects the legal marijuana market to hit $73.6 billion by 2027. Marijuana Business Daily believes the economic impact of the legal marijuana industry could reach $130 billion by 2024. The road to a $73.6 billion market is a rocky one right now, but it wont be that way forever.
Also, because marijuana was classified as a Schedule 1 drug, medical research on the plant was extremely difficult for decades. Now, scientists have the ability to experiment on the marijuana plant to see what other medical benefits it holds. The smallest legitimate scientific find could jump start the industry and rocket stock prices instantly.
For investors jumping in and out of stocks, catching, and successfully riding the wave, continue to do what increases your account balance, but don't discount the ability to make money from buying and holding long-term.
The time of the marijuana company will come, and it will likely be spearheaded by big Wall Street banks buying on news of less stringent regulations and a better business outlook for the companies in the industry. When this day comes, don't get caught chasing high prices, instead invest now and wait.