It’d be a vast understatement to say 2019 was a nasty year for cannabis stocks. Aurora Cannabis led the downward charge, and many other “established” marijuana producers followed suit by plunging as much as 80% from early 2019 highs.
While the industry has suffered massive corrections many times in the past, this time is seen by many as the final bubble burst, given there are now fewer catalysts to look forward to now that we’re in an underwhelming post-legalization era.
Investors aren’t buying into the edibles (or Cannabis 2.0) tailwind. With HEXO leading the latest downward charge after severely diluting its shareholders, it seems as though it’s the curtains have all but closed on an industry that minted many millionaires before legalization day.
Back before weed was legalized in 2018, I’d strongly urged investors to take profits on their pot stocks, or risk losing it all, as I’d predicted that a “sell-the-news” scenario would pan out when cannabis finally became legal.
I also highlighted the fact that marijuana was nothing more than a commodity given the regulatory environment that was to be put in place and that the black market would fulfill the supply shortage “hallucination” that many investors were buying into leading up to and following legalization day.
“Within the first year or two of legalization, the average price per gram is likely going to be considerably higher [than black market weed], and while I’m sure many pot smokers would be willing to open their wallets for the convenience, I think many would find it much more economical to grow their own,” I’d said in a prior piece that warned investors to sell their pot stocks.
“For those who can’t grow their own, they’ll likely know someone who can grow it and share (or possibly sell) it to them in large quantities. A single marijuana plant could produce more than enough product for several chronic users. Given the potentially relaxed attitude toward household marijuana growth, there’s a high chance that medical and recreational users will get their pot from a black market source.”
Indeed, this is what played out, as the spread between legal and illegal weed has continued to widen since it became legal over a year ago. And it seems as though regulators haven’t done enough to incentivize cannabis users to buy from pricier, legitimate sources.
I’m bringing up my correct pre-legalization prediction, not to brag, but to drive home the point that the rules of commoditized industries still apply in the seemingly crazy world of marijuana, an industry that some saw as “special.”
Pot is a fungible (or almost fungible) commodity that’s at the mercy of supply and demand. As such, all the regular rules still apply.
Moving forward, it’ll be up to the licensed producers (LPs) to drive down operating costs to provide lower prices and budget weed for users to be more competitive with the black market, which appears to be operating more efficiently than many of the smaller, cash-bleeding LPs that have been caught offside over the last few years.
In the 2020s, I predict there will be a slew of junior, poorly managed LPs that will go belly up or be acquired for pennies on the dollar, as behemoths in the space like Aurora look to drive down margins with the hopes of drowning out the black market and less-competitive LPs that are just sitting ducks.
Aurora and many other market leaders will rise out of the rumble and dominate the industry, but until then, it’s going to be a war against the black market and a race to see who can produce the cheapest weed. Given Aurora’s price advantages, I give it the edge, and with legendary hedge fund manager Nelson Peltz standing in its corner, I’d look to put money in the name on the way down.
But beware; Aurora stock could fall below $1 over the next year or two, as the entire industry faces margin pressures. With deep pockets, though, I see Aurora as a significant acquirer as the industry ship continues to sink.
Stay hungry. Stay Foolish.
