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Canna Aid

High Hopes and Low Returns: Is Market Failure Baked In?

Cannastocks' Downward Spiral: A Closer Look

By Matt Weeks

Wall Street investors have proven they can make money off of anything (and frequently off nothing), but there’s one thing traders can’t figure out: how to make money selling drugs.

That should be funny, but it’s a genuine concern. If America’s most brazen capitalists can’t turn a profit on cannabis, it puts the industry at a disadvantage. Without investments, cannabis companies will struggle to open, grow, innovate, and influence politicians. If they can’t meet consumer expectations, belief in the industry could sag, leading to stalls (or worse, reversals) of pro-cannabis legislation.

If responsible cannabis investors want to support the industry while turning a profit, they need to take a cue from Wall Street and wise up about where they put their money. Market watchers point to three problems underlying the failure of cannabis stocks to turn profitable: a misunderstanding of the industry, strict banking regulations, and oversold hype.

Executive Overreach

Starting in 2018, cannabis startups flooded the market with the goal of becoming the Amazon of weed. Executives from other industries jumped in line to launch the Next Big Thing. The basic idea was to start a company that would have time to fine-tune its operations just in time for the federal government to pull the trigger on legalization.

They overbuilt and raced each other to the bottom. They forgot about the most important thing in weed—quality.

But cannabis is an agricultural product. It doesn’t follow the same rules of technology, finance, or consumer goods. The biggest players didn’t understand the fundamental truths about the business, said Jeff Beverly, an industry veteran and founding partner at Kola Venture Group.

“They overbuilt and raced each other to the bottom,” he said. “They forgot about the most important thing in weed—quality. So many of the C-suite suits don’t even toke. They also thought everyone wanted a spa-like dispensary or the next Apple Store of weed. Now, they all think canna-beverages will save the industry.”

Chris Becker of The Honeybee Collective pointed out that Amazon spent many years as a bookstore before it built itself into a monolithic e-tailer. It also benefited from a hyper-competent CEO, who proved adept at managing the corporate sprawl that seeped into disparate and differentiated industries. It’s not an easy formula to replicate.

“The West Coast tech ethos has sort of invaded the entire startup space and everybody thinks that’s how you do it across all industries, but it doesn’t really apply to this one,” Becker offered. “They’re looking for early investments to get 10X returns, and that’s just not realistic—certainly not on a three-to-five-year timeline. It’s unrealistic to expect that of these nascent markets, that we’re building from zero.”

The Honeybee Collective is a worker-owned cannabis brand specializing in sustainable cannabis. They buy eco-friendly cannabis products and package them in recyclable, compostable packing. It also gives Becker a unique perspective. He pins some of the blame of poor stock performance on cannabis companies that are trying to do too much too quickly.

“How many executives are actually Jeff Bezos capable of building a massive distribution operation with a bunch of regional hubs and also cultivating a difficult-to-produce crop, then extracting, then making it into consumer packaged goods, then making those consumer packaged goods highly craveable by consumers?” asked Becker. “Our thesis is that specialization is what you need to be successful in the industry. We limit our operations to sales and marketing and brand development. We let growers grow, we let manufacturers manufacture and we let distributors distribute, because we know what we’re good at.”

How Bad is it?

American canna stocks have been on a steep downward tear since February 2021. Even when good news—like a new state legalizing—pushes prices up, prices drop again, usually to new lows.

An easy way to visualize the market is to glance at the lifetime performance of The North American Cannabis Index, a fund that includes an array of stocks from all corners of the industry—dispensaries, research outfits, cannabinoid suppliers, etc. Its performance graph is a jagged line, sloping down and to the right.

Worldwide, the situation is only slightly better. The Horizons Marijuana Life Sciences Index, which includes C stocks across the globe, spent much of last year only slightly above its lowest point ever (in 2021). Compared to American stocks, the world market has been steadier, but still in a modest decline most of last year.

A Buzzkill Performance

Historical Stock Performance Analysis of Leading Cannabis Companies from Initial Public Offering (IPO) through October 2023

There was this sort of mass delusion that cannabis stocks were going to be a generational wealth opportunity. And, unfortunately, they just weren’t that.

How we Lost it All

Jay Rider (not his real name) invested a healthy five figures of his money into canna stocks starting in 2018.

“I got excited about some of the state legislation that was going on. I felt like it was a movement that was going somewhere,” he said. “As a result, I just did a little due diligence and came up with four or five companies I thought were players. I really fell on Canopy Growth and a few others. I bought that stock and planned to hold it. It was a long-ball play. But I lost a lot.” 

Rider wasn’t alone. Investment advice columns and boiler room scam artists sold the public on buying canna stocks early. In September 2018, the home-trader app Robinhood had to suspend all buys for Aurora Cannabis Inc. because it couldn’t keep up. (The stock peaked at $120 per share that year but spent most of 2023 trading for around 50 cents.)

“There were some people who made a lot of money, but they were trading options and got out early,” Rider said. “But yeah, it did feel like a boiler room. Like, we’re all going to talk about this one stock, then it’s going to go way up, and then we’ll get out and everybody else will be left holding nothing.”

It wasn’t just 2018, either. The canna stock market surged again during the Covid-19 pandemic, when groups of novice online investors used their spare time to manipulate stock markets, driving up the price of GameStop, AMC Cinemas, and a few cannabis companies. 

“Hype cycles have been a big problem,” Becker said. “There was this sort of mass delusion that cannabis stocks were going to be a generational wealth opportunity. And, unfortunately, they just weren’t that.”

Fixing the Problem

The biggest trouble with cannabis stocks isn’t that the public might stop responding to the boy who cried stocks. It’s banking regulations that prevent big-money institutional investors—hedge funds, pension funds, endowments, etc.—to buy stocks in cannabis.

Fortunately, there’s been a push to change things. The SAFER Banking Act would open cannabis investments to banks in states with legalized cannabis. But a better option would be federal action to make the substance legal.

“Even if we reschedule cannabis down from a 1 to a 3, that would unlock a new layer of investors,” said Becker. “When you think of institutional money managers, there are different levels of risk tolerance among them. So, some big insurance companies might only invest in very safe, blue-chip stuff. But there’s still a lot of people with multibillion-dollar piles of money who are willing to invest in more speculative stuff. That would bring in a new level of capital availability in the industry.”

Once institutional investors can get into the game, everything changes.

Not only will companies have access to new capital, just as the first cannabis businesses reach maturity, it will make investments safer for those Average Joes who got hosed the first time around.

“I’m not saying that there aren’t winners amongst the current MSOs, but I don’t think it’s terribly predictable which ones will win out because so much of their success is dependent on things that are out of their control, like regulatory changes,” Becker said. “I would only buy stock in a cannabis company today if I had a lot of faith in the management and what they were doing. Because the time to invest is right before that next level of capital gets unlocked, right? But most cannabis stocks, they’re not good investments.”

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