Value Investors Get Into the Weeds with Cannabis Equities

As investors continue to favor more value-oriented equities, certain market niches are presenting themselves with attractive valuations relative to their current prices. One of those sectors is the still-nascent cannabis industry and value investors are starting to get into the weeds with these potential market opportunities.

“2019 has been an extremely disappointing year for investors in cannabis stocks, with the overall market, as measured by the New Cannabis Ventures Global Cannabis Stock Index down 20% after a 55% decline in 2018,” wrote Alan Brochstein in Forbes. “The market, which has declined over 71% since early 2018, has moved to three-year lows:

Cannabis Index

Earlier this year, ETFs like the ETFMG Alternative Harvest ETF (NYSEArca: MJ)and the Canada-based Horizons Marijuana Life Sciences Index ETF (HMMJ)were off to a strong start in 2019 as both crossed the $1 billion mark in assets.

This is not the first time HMMJ crossed that milestone, last achieving the feat back in October 2018 when Canada legalized marijuana. As for MJ, like most U.S. equities in late 2018, it got racked by the volatility in November and especially December as the ETF fell below its 200-day moving average.

Now, the industry continues to face challenges, but this time, it has to do with funding.

“The current environment is challenging, as funding has dried up, a situation I discussed a month ago,” Brochstein noted. “Many companies won’t make it or will have to raise capital on extremely unfavorable terms that will substantially dilute shareholders, as they aren’t adequately capitalized. Investors are quickly figuring this out, and the broad selling has certainly hurt the companies with high cash-burns and weak balance sheets the most.”

“With that said, the aggressive selling over the past seven months has impacted companies that appear to be adequately capitalized as well,” added Brochstein. “The cannabis industry has attracted many growth investors over the past few years, but the steep decline across the board has left some companies that I think should appeal to value investors.”

Canada jumpstarted the cannabis industry and it’s where value investors can start when looking for value-based equities.

“In Canada, there are 51 public companies that grow or process cannabis that own just some of the 245 licenses issued to date by Health Canada,” Brochstein wrote. “Value investors should relish in the overabundance of names, as it makes thorough diligence of the sector quite challenging. In other words, with so many companies, it’s quite possible investors could make mistakes, creating opportunity for investors who are able to find the proverbial baby in the bathwater.”

For more market trends, visit ETF Trends.