Cannabis Corner: Bad Times for the Majors

Hilary Kramer

Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street.

The cannabis group remains on the defensive, down another 10% this week amid news that major producer Aurora Cannabis Inc. (NYSE:ACB) is actively shrinking.

ACB shareholders were braced to see sales growth evaporate or, at worst, recede 5-10% from last year’s level. After all, the company has finally joined the Cannabis 2.0 universe with premium brands designed to defy what looks like a serious supply glut.

But there’s no real excuse for a 25% decline. People aren’t paying as much for recreational plant product as they did last year, and sellers like ACB haven’t figured out how to recover their pricing power.

Negative growth is bad news in an industry built around explosive expansion. At this rate, ACB management needs to think outside the box to get the numbers moving back in the right direction.

They’ve filed to sell another $300 million in stock to fund acquisitions. While it may provide a long-term lifeline, it’s not great for existing shareholders.

However, ACB’s challenges aren’t universal. Canopy Growth Corp. (NASDAQ:CGC), the company’s closest peer, has had a bad year too, but it also has strong corporate backing to draw on when its growth hits a wall.

And the new Tilray Corp. (NASDAQ:TLRY) has already swallowed its pride and merged with onetime rival Aphria to achieve profitable scale. At least that stock seems to be finding support now.

For us, the question of whether cannabis is hot or cold depends on the spots you’ve picked on Wall Street and your timeline. If you just bought the majors in the past month, you’ve had a bad time.

But my subscribers in IPO Edge don’t buy the majors or trade for instant gratification. We’re in small names for a holding period that can be measured in months, not minutes.

On those terms, the group as a whole has held up relatively well. My proprietary cannabis index is still up 28% so far this year, practically triple what the S&P 500 has delivered over the same period.

If you were able to hold on for that length of time, you’re probably feeling pretty good. And with key stocks like TLRY finding support now, the future doesn’t look grim.

Just don’t grab a big stock like ACB and think you’re done. Real cannabis investing is a little trickier than that, but the rewards make it all worthwhile.

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