This Is Why Wall Street Is Pessimistic About Cannabis Investments
Wall Street is extremely cautious about the cannabis sector, despite global sales clocking record highs of $12.2 billion in 2018. Even on Canada and 10 US states legalizing recreational use, very few high profile investment firms remain bullish about investment opportunities in the sector.
Since mid-last year, only few pot stocks have caught the attention of Wall Street resulting in coverage. While some stocks have attracted ‘buy’ and ‘hold’ ratings a good number of downgrades have come into play signaling waning investment confidence.
Cannabis Stocks Downgrades
Cronos Group Inc. (NASDAQ:CRON) is one of the stocks that has attracted interest depicted by three downgrades on different occasions. GMP Securities initiated coverage of the stock with a ‘hold’ rating as BMO Capital, and Canaccord Genuity reiterated a ‘sell’ rating on the stock.
Canopy Growth Corp (NYSE:CGC), which is billed as the largest cannabis stock, has also not caught the attention of Wall Street in the right way. GMP Securities initiating coverage of the stock with a ‘hold’ rating, signals underlying concerns not only, with the company, but the broader cannabis sector
Tilray Inc. (NASDAQ:TLRY) is another stock that has not been spared after experiencing wild price swings in recent months. Since September of last year, the stock has shed more than 60% in market value. The underperformance has since attracted downgrades with Northland Securities valuing the stock as a ‘hold’ from an initial ‘buy’ rating.
The increased number of downgrades all but raises serious concerns about a sector that was believed to be growing at an impressive rate, faster than even the soda industry.
Just two stock upgrades indicate growing concerns. One of the stock upgrades, which was by Canaccord Genuity on Cronos Group, has since been downgraded to a sell. The other upgrade issued by the firm was on Canopy growth mid last year from ‘hold’ to a ‘buy’.
Wall Street Pessimism
One of the reasons why Wall Street remains pessimistic about cannabis stocks has to do with the supply-chain issues that continue to clobber the sector. Supply issues manifest from a backlog of 800 license applications with Health Canada. With the applications set to take months, before approval, supply chain issues are likely to persist.
Health Canada issuing a string of requirements about cannabis packaging also appears to be taking a toll on cannabis supply in the market. The fact that cannabis growers are nowhere closer to operating at full capacity when it comes to cannabis production also has Wall Street worried.
Supply chain tailwinds essentially mean companies will take much longer before they become profitable to generate shareholder value. Most cannabis companies are far off from becoming profitable as most of them are investing vast sums of money on expanding their production capacity.
Tax revenue from the cannabis sales falling well below expectations in California, also explains why Wall Street is maintaining a cautious approach. Widening net loss is another tailwind not giving Wall Street much confidence.