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Why Did Cannabis Company Stocks Go Up In Smoke?

 

For his reporting, senior reporter for Business Insider Jeremy Berke has seen legal dispensaries full of people buying cannabis products — but he doesn't see the same hype at the corporate level.

"There is absolutely a disconnect between what you see on the ground and what you see in the public markets," he says.

Pot stocks are down over 50% since their peak at the beginning of 2019, he says. Some individual stocks have fallen even further — MedMen, for example, is down close to 80%, he says.

During the dot-com boom, the advent of the internet led investors to overvalue stocks because of "irrational exuberance," a term for when "people are genuinely very excited about an attractive story," he says. In this case, that enticing story is the legalization of cannabis in the U.S. and Canada.

"People poured their money into it," he says, "and people were hopeful that these companies would make more money about a year into legalization in Canada and a lot of states than they actually have been."

There are several reasons why the industry hasn't been more profitable: Legalizing cannabis is difficult for policymakers because of issues with equity and licensing, he says. On top of that, the sector was weighed down by thousands of people across the U.S. becoming sick from vapes.

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Companies strategized based on legislation moving faster than it has and put out "aggressive forecasts for revenues" that haven't been met, he says.

The industry thought New York would legalize, for example, but the state still hasn't. Legalization is also moving slower than expected in other east coast states like Connecticut and Pennsylvania.

Plus, a lot of cannabis stocks are held by young retail investors, so price fluctuation isn't as efficient as it would be if Fidelity Investments or a large pension fund held the stocks, he says.

"People get skittish," he says. "And as soon as you see maybe sales lagging behind expectations one quarter, then people start to pull out."

On the federal level, THC — the main psychoactive compound in pot — is still illegal. This hurts the cannabis industry because companies can't access banks opening lines of credit, he says.

The industry also faces competition from the illegal marijuana market, he says. California, for example, stated erasing the illicit market as one of the goals of legalization.

The state taxes every part of the marijuana supply chain, making legal cannabis a lot more expensive. For consumers, "the novelty of legalization sort of wore" and people returned to the cheaper option — illegal cannabis, he says.

Berke says the marijuana executives and investors he speaks with expect the stocks to rebound since the industry is still getting started.

"It’s picking itself up by its bootstraps but there’s hopefully some good news to come in the future," he says. "But it remains to be seen."


Chris Bentley produced and edited this interview for broadcast with Kathleen McKenna. Allison Hagan adapted it for the web.

This article was originally published on WBUR.org.

Copyright 2020 NPR. To see more, visit https://www.npr.org.

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