Are Pot Stocks Shareholders Stoned?
Mon Aug 12 2019
Here at www.420finmgmt.com, we a have watched the publicly traded Canadian cannabis stocked closely over the past couple of years. Although the press seems to be painting pictures of everybody making money, in reality, it is a tough sector to be invested in. Growing marijuana has the economics of growing carrots, with the additional government regulation of the insurance companies. There is also high regulatory risk like with the manufacturing of pharmaceuticals. Legal producers also have to compete with illegal producers, and also legal prices are dramatically more expensive versus illegal weed. There are also with hundreds of entrants with more on the horizon coming being funded with billions in equity capital from all over the world. All of these combatants, legal and illegal, old and new, are locked in a bloody price war, each trying to gain marketing share. If this sounds like a great place to invest, I’ve got a bridge in Brooklyn that you can invest in as well. You’d have to be super stoned on some potent shatter to want to have any of these companies in your investing portfolio.
Cannabis Supply Out Racing Demand
Early movers in the industry made a lot of money, however, the cannabis boom is rapidly ending. As special as is, cannabis, at the end of the day, is a commodity product. Its price is based on supply and demand for cannabis. Even with billions in subsidies from the US government, there aren’t many wealthy farmers. Agriculture is a terrible business. The legalize of recreational marijuana in Canada hasn’t really grown demand that much. On the other hand, supply is growing exponentially faster. There are now 24 months of supply of dried cannabis and 15 months of supply of cannabis oil in Canada. This is while every publicly traded cannabis company is talking about dramatically increasing production. Prices have nowhere to go but down.
Hopefully, everyone learned in Econ 101 when supply overwhelms demand, pricing falls, fixed costs stay constant, and operating losses go to the moon. The cannabis industry is no different than the farmer example from Econ 101. Only the stock valuations are totally in outer space, and most producers are focused on scaling up production and gaining market share. Yes, companies are trying to build the brand of their very own buds, but you could say the industry is similar to the craft beer as well. There are thousands of beer brands (and too many IPAs), while only a few market leaders are making money at it. Most cannabis companies are losing money during the peak margin phase as they’re all equity funded and focused on market share—not profits. When prices collapse as we see in Oregon, the operating losses will be through the roof. Even worse, the legal sector is fighting against a black market that has dramatically cheapen the product. The other difference between craft beer and buds is most cannabis consumers are not branded consumers. Don’t get mad at me Stoner Fam when I say most people are just going to smoke what gets them high for the cheapest.
What has happened in Canada will happen in the US once it is fully legalized. A business will always out-grow its demand if you throw unlimited capital at it. It is too early to talk about the collapse in US cannabis. Right now, we see the Canadian cannabis companies collapse in real-time.
Every new sector, like railroads in the 1800s and the telecoms in the 2000s, always has a similar arc of revenue growth, market share gains, un-profitability, collapse, bankruptcy, and consolidation. Cannabis will follow a similar arc.
The Cannabis Boom Is Over And The Collapse Begins in 2019
In a few years, it would be best to pick through the wreckage and find a few winners to own for the recovery phase. If you are looking for stocks to short first find out if it’s Canadian, liquid, has liquid options, is unprofitable and has high debt, it is a safe bet to make money shorting when the industry collapses in the coming future.