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Marijuana Stocks Plummet to Record Low: What's Next?

Zacks Equity Research
Legalization has long been considered a boon for the marijuana industry.

Over the last few days, share prices of major marijuana stocks have plummeted to their worst in the trailing eight months. This free fall commenced following the legalization of marijuana for recreational use in Canada on Oct 17.

Legalization Considered a Boon for the Industry

Notably, legalization has long been considered a boon for the marijuana industry. Canada has become the first major world economy and the second country after Uruguay to legalize recreational use of marijuana.

In the United States, nine states and Washington, D.C., have currently legalized recreational marijuana, while 29 states have legalized medical weed. Medical use of marijuana has been legal in Canada since 2001.

Effective Oct 17, Canadians can legally buy and consume marijuana. Growing legalization of recreational or medical marijuana is likely to bolster investors’ confidence in this industry.

Extremely Volatile Industry

Recent plunge in share prices of marijuana stocks is a result of market concerns regarding retailers facing supply shortages in the early days of legalization. Per a recent report by BNN Bloomberg, the pot industry in Canada is struggling with shortages as provincial and private-sector retailers struggle to keep up with the strong demand for recreational cannabis in the country.

Marijuana industry is considered as extremely volatile. Most of these companies are in their early stages of development and characterized as risky one for investors. However, this industry had been providing fabulous returns to investors in 2018 before the legalization in Canada.

Since the industry is in its nascent stage, even a minor negative may become the cause of major stock price fluctuations. The news of supply shortages results in panic selling as investor’s look to offload risky stocks. According to some industry experts, 5-10% share price volatility daily should not be considered as unnatural for this industry.

On Oct 22, shares of major marijuana companies such as Tilray Inc. TLRY, Cronos Group Inc. CRON, Canopy Growth Corp. CGC and GW Pharmaceuticals plc GWPH tumbled 15.6%, 12.3%, 11.2% and 2.1%, respectively. Cronos Group and GW Pharmaceuticals carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The chart below depicts price performance of four marijuana stocks in the last three months.

Strong Market Potential

Research firm Euromonitor has estimated that the American market for legal marijuana products will reach $20 billion by 2020 from mere $5.4 billion in 2015.

According to the Arcview Market Research, the U.S. legal cannabis market is expected to reach $11 billion in consumer spending in 2018, expanding further to $23 billion by 2022. Research firm Cowen projected that the market size of U.S. legal cannabis industry will reach $75 billion in by 2030, surpassing the carbonated soft drink market in 2017.

Many beverage giants have decided to invest in cannabis. The Coca-Cola Co. KO is in talks with Canada’s Aurora Cannabis to develop cannabidiol infused beverages. Recently, Constellation Brands STZ raised its stake to 38% in Canopy Growth after investing $4 billion in the company.

Bottom Line

Marijuana industry has strong potential especially after legalization for recreational and medicinal use. However, extremely volatile nature of this industry remains a primary concern. Consequently, investors should be careful about timing and selection of stocks within this industry.

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