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What Went Wrong With the Marijuana ETF on Wednesday?

Sanghamitra Saha
Downbeat earnings have weighed on the marijuana ETF lately. Should you buy the dip or wait on the sidelines?

Marijuana stocks and the related ETF have been on a volatile ride of late. While growing efforts for legalization, both for medical and recreational usages, have been a tailwind for the industry, bubble fears are causing occasional dips in the stocks.

Plus, two of Canada’s top cannabis producers, Canopy Growth Corporation CGC and Tilray Inc. TLRY posted net losses, sending pot stocks on a downhill ride on Nov 14.

Tilraylost about 8.3% on Nov 14 and about 1.3% after hours. Canopy Growthretreated about 10.9% on the day and is down 0.8% in the after-market session. Aurora Cannabis Inc. ACB too plummeted about 8.1%. Cronos Group Inc. CRON was down 2.3% and 2.5% in the key-trading and the after-market sessions, respectively. The pure-play fund ETFMG Alternative Harvest ETF MJ was off 4.45% on Nov 14 and shed about 1.7% after hours (read: Top ETF Stories of October).

Inside Downbeat Earnings & Guidance

Canopy Growth came up with disappointing fiscal 2019 second-quarter results before the market opened on Nov 14. The company's revenues missed expectations and recorded the biggest loss in the company's history.

Rising costs weighed on the bottom line as sales and marketing expenses more than quadrupled from the year-ago period and general and administrative (G&A) costs shot up 342% year over year. To add to the woes, Canopy Growth CEO Bruce Linton sounded less optimistic about the industry’s growth in America at least in the near term.

Among other companies, Tilray beat views late Tuesday, while Cronos Group CRON reported mixed results, but both reported a decline in average selling price for cannabis products. Canada-based Aurora Cannabis’ fiscal first-quarter net earnings skyrocketed more than 2800%, but the gains were from the company’s investments.

What Lies Ahead?

Canada's legalization of cannabis for recreational use, which sent the stocks higher, happened in mid-October. So, the companies are yet to benefit from the legalization materially. Also, the opening-up of several medical marijuana markets on the international level is pending. Notably, things are looking up in Germany, United Kingdom and Mexico.

Per Motley Fool, the losses in Canopy Growth and Tilary were largely due to higher costs pertaining to the Canadian recreational-marijuana market. The source went on to mention that Canopy’s revenue miss should not be very concerning as it mainly came from the sales of medical marijuana in Canada, a market which is going to weaken in the coming days amid the rise of recreational marijuana.

According to Chris Walsh, the founding editor of Marijuana Business Daily, estimated that “the U.S. cannabis retail market could reach as high as $24.3 billion in 2022, up from the estimated $7.4 billion to $9.3 billion expected for this year.”

Still, it seems that overvaluation is a threat to the space. It does have bright long-term prospects. But things will probably shore up slower than anticipated. So, cautious investors may choose to wait on the sidelines till they find better entry points or a driver (read: Will Cannabis ETFs be on a High Again?).

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Cronos Group Inc. (CRON) : Free Stock Analysis Report
Canopy Growth Corporation (CGC) : Free Stock Analysis Report
Tilray, Inc. (TLRY) : Free Stock Analysis Report
ETFMG-ALT HRVST (MJ): ETF Research Reports
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