It has been a brutal year for cannabis investors. Heading into 2020, cannabis investors are now weighing whether to cut their losses or buy the dip in a bet on a rebound ahead.
While leading cannabis stocks like Canopy Growth Corp (NYSE: CGC) appear to have bottomed in November, many of the lower-tier names have continued lower into the end of the year, dragging down the group as a whole, Brochstein said.
“I think the issue may be a little bit of tax loss selling. The rest of the market is having a really nice year, and we’re having a really crappy year,” he said.
Brochstein's Longer-Term Bull Thesis
Despite the bumps in the road, Brochstein remains bullish for the long haul.
“I think this is going to be a great story as it plays out over multiple years, but there’s always potholes and this year was full of them,” he said.
Brochstein said supply constraints in Canada, lackluster rollouts in California, the vaping crisis and a cannabis capital crunch all combined to create a perfect storm for cannabis stocks in 2019.
“My outlook for next year is not a roaring bull, although I could be surprised I suppose. The downturn we’re going through is really healthy for the industry.”
A surplus exists of public cannabis companies, and the market downturn will eliminate many of the worst companies and allow others to consolidate, Brochstein said.
The 420 Investor's Stock Picks
Brochstein said the company is taking on its cash problems aggressively.
Aurora and Tilray Inc (NASDAQ: TLRY) are the weakest among the top-tier cannabis stocks in terms of funding given that Canopy and Cronos Group Inc (NASDAQ: CRON) have large strategic investors, he said.
"Both these companies need to raise cash to fund their U.S. operations. So in terms of running out of cash, the reality is they’re not going to run out of cash," he said. "They have an ATM, and they’ll keep hitting it ... I’m more concerned that they may have to slow down in the United States."
Looking ahead to 2020, Brochstein said he expects the cannabis stocks with the best balance sheets to continue to outperform.
"We’ve already seen a few bankruptcies, we’ve seen some companies raise capital at atrocious levels — and there are some companies out there that are going to really struggle next year, and I think this is going to be to the benefit of the well-capitalized companies that are proving out their business models."
"These are the two companies that are best-positioned in Illinois, which is legalizing in less than two weeks ... you have a headline catalyst that I think could be positive."
Other Experts Weigh In
Kase Capital Management hedge fund manager Whitney Tilson also weighed in on cannabis stocks last week, saying that the massive sell-off has likely started creating buying opportunities.
“Unlike bitcoin and other cryptocurrencies — which are nothing but a techno-libertarian pump-and-dump scheme, so there is no price at which I would recommend them — the cannabis sector is very real and will grow enormously from here. Thus, my instinct is that investment opportunities are beginning to emerge in the sector,” Tilson said.
Stansberry Research analyst Tom Carroll also said last week that market dynamics alone may drive cannabis stocks higher in early 2020.
“Given that almost everyone is underwater on their investments in this sector, there's likely a lot of heavy selling to capture tax losses, which is pressuring stocks this month. But people — especially individuals — want to own these things, so they will buy back in January,” Carroll said.
The long-term outlook for the cannabis business remains bright, but determining the timing of regulatory changes and predicting the ultimate market share winners is extremely difficult at this point. Cannabis investors should be prepared for more unpredictability and volatility in 2020.
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