It hasn’t been a great year for those invested in the cannabis sector. Year to date, the Canadian Marijuana Index is down 15% and has been in a steady downtrend since February. The Index hasn’t been this low since the industry experienced strong tailwinds in late 2017.
It’s been almost two years and long-term investors are averaging negative returns. So why is this sector that holds so much promise underperforming the broader TSX Index?
It’s simple: bad news has dominated the headlines. Here are but a few of the newsworthy items that have plagued the sector:
- CannTrust (TSX:TRST)(NYSE:CTST) was caught with illegal growing operations. To make matters worse, it appears that they intentionally mislead Health Canada officials, and high-level officials have now been accused of insider trading. This saga is still playing out and its assets may be sold for pennies on the dollar.
- Canopy Growth Corp (TSX:WEED)(NYSE:CGC) suddenly dismissed CEO and co-founder Bruce Linton in early July.
- Aphria (TSX:APHA)(NYSE:APHA) was caught up in a scandal in late 2018 in which a short seller accused the company of engaging in takeovers that are essentially worthless — all in the name of lining insider pockets. This led to an investigation, the ousting of former CEO Vic Neufield and co-founder Cole Cacciavillani and a write-down of assets.
Regardless of your opinion on any of these individual companies, there is no denying that each situation has clouded the entire cannabis industry.
If you notice, all these scandals have one thing in common – poor governance. This isn’t surprising.
Every year, the Report on Business releases its annual evaluation of Canada’s corporate boards (Board Games). In its annual review released last November, it analyzed the governing practices of 237 TSX-listed companies. Where did Canada’s largest pot stocks rank?
Aphria ranked 227th and Canopy Growth Corp came in second to last. Who came in dead last? That would be Aurora Cannabis (TSX:ACB)(NYSE:ACB). Interestingly, those which rank in the lower tier tend to be among the TSX’s laggards.
The most recent Board Games report was a warning shot across the bow. Given all the recent governance issues, the market is beginning to take notice – good corporate governance is important.
Rhaul Bhardwaj, CEO of the Institute of Corporate Directors said it best:
“You might be able to get away with less than tier-one corporate governance for a while, but it would be unwise to wait for your stock price to drop and the market tell you your corporate governance practices aren’t up to snuff, because now you’re dealing with it in the vacuum of a crisis.”
Sound familiar? This is exactly the situation many of the industry leaders now find themselves in.
Despite all the negativity surrounding the industry, it still shows much promise. Now trading near multi-year lows, it may be the time to take advantage of overly bearish sentiment.
Prices have come down considerably, and the recent downtrend may prove to be an excellent entry point.
Keep in mind however, that this is still an industry in its infancy and is a speculative play at best. This isn’t a sector you dump your retirement money into. If however, you do have spare investment funds kicking around, it may be worth a gamble.
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Fool contributor Mat Litalien holds no position in any of the companies mentioned.