Volatility across the markets soared this week. The norm seems to be a 2-4% swing on the broader indexes which usually translates into even more volatility for the cannabis sector.
The cannabis stocks remain close to 52-week lows. On Wednesday Canopy Growth announced the closure of two facilities and about 500 jobs that will be cut. The cannabis sector continues to feel the pain of inadequate Canadian government support, over-regulation and snail pace retail rollout.
As we see more and more companies make critical readjustments due to the market conditions, 2020 is looking like the make or break year for many companies. Shrinking revenues and high debt loads for many of the largest cannabis companies are really dragging on valuations. This combined with the overall uncertainty surrounding the COVID-19 virus that has sent ripples through the stock market has created another tough week for the cannabis sector.
Canopy Growth (CGC) Closes 2 Facilities and Cuts 500 Jobs
More bad news hit the cannabis sector this week as the over-regulated Canadian cannabis market forced Canopy Growth to close two of their production facilities in British Columbia. The closures eliminated 500 jobs from the Canadian economy. CGC also announced that they would also be writing down $700-800 million of pre-tax charges on their next quarterly earnings report. This unfortunate news paints the extremely tough unsupportive environment that these struggling cannabis companies have to deal with. There needs to be a stronger push for deregulation when it comes to opening up more retail locations so these companies have a chance at growing revenues. As companies like CGC adapt they will become leaner and more efficient for the future. The only question is how long will it take for the market to turn around?
Cronos Group (CRON) receives an upgrade
Cronos was shining like a diamond in the rough this week as the company received an upgrade from MKM Capital’s analyst Bill Kirk. Recently Kirk was known for his bearish tone of the cannabis sector but has been warming up to the opportunity after CGC recorded an uptick in revenues. CRON was upgraded
from a neutral to a buy rating although he lowered his price target from $13 to $12. CRON can enjoy the benefit of the 1.8 billion dollars that Altria Group invested in the company while the sector takes time to mature.
Aurora Cannabis (ACB) hits fresh 52-week lows
Many investors are waiting anxiously as Aurora Cannabis races to find a new CEO to steer the company back on track. The company is riding dangerously low in cash, so the market is anticipating that ACB could be working towards a capital raise. The stock continued on a downward trajectory to hit fresh 52-week lows. Many investors are weighing the possibility of a reverse stock split if the company trends closer to $1. The $1 level is the minimum price that an NYSE listed company needs to maintain and if they fall below this level they could risk being delisted. A reverse stock split would boost the price of the stock by merging shares effectively taking their share could down depending on the conditions of the split. A higher share price could cause management to be a bit more relaxed and ease off the gas when it comes to turning the company around. These are simply rumors in the investment community but it is pretty obvious that ACB will need to address their financing issues soon.
The HMMJ hovers at 52-week lows
The Horizons Medical Marijuana Life Sciences ETF hovered at 52-week lows all week as the roller coaster ride continued for the stock market. The HMMJ is a great way to get an idea of how the overall index is performing and needless to say it has been an extremely volatile week. Investors were not in favor of risk, for the most part, this week which is why the cannabis sector found little traction during the days when the market rallied. If the indexes can manage to hold on to gains and the volatility subsides then the cannabis sector could have a much better chance at seeing a rebound.
ACB shares were trading at $1.23 per share on Friday morning, down $0.08 (-6.11%). Year-to-date, ACB has declined -43.06%, versus a -8.39% rise in the benchmark S&P 500 index during the same period.
About the Author: Aaron Missere
Aaron is an experienced investor who is also the CEO of Departures Capital. His primary focus is on the cannabis industry. He also hosts a weekly show on YouTube about marijuana stocks. Learn more about Aaron’s background, along with links to his most recent articles. More…