The Canadian cannabis sector continues to remain relatively beaten down, despite some solid news coming out of the Trump administration that marijuana may be re-classified as a less-dangerous drug south of the border.
What was once a catalyst for Canadian cannabis stocks, many of which had their eye on the prize (which is the massive and growing market for cannabis consumption in the U.S.), the U.S. market may seem more closed than ever to foreign companies. Under President Trump, this seems to be even more true today than when his second term began.
This is certainly one of the key threats keeping investors in Canopy Growth (TSX:WEED) and other cannabis producers up at night.
Let’s dive into another couple of threats that investors in Canopy and the cannabis sector as a whole need to keep in mind.
Source: Getty Images
Growth will need to resume
One of the key factors I think drives the price action in the chart above is the sheer fact that the underlying fundamentals of this sector have deteriorated considerably in recent years.
As I pointed out five or six years ago, when the cannabis boom was in full throttle, the accounting methodology, which allowed companies like Canopy to book plants grown as revenue (before they were sold to retailers or end consumers) led to a surge in perceived pro forma profitability in Canopy’s earlier years, but has also led to some stark negative downstream effects.
This past year, Canopy has seen revenue decline by nearly double-digit percentages in most time frames. That’s not good for any company. And in an industry that’s often thought of as a growth sector, a lack of top-line growth is something most investors simply can’t ignore.
Cannabis market continues to face challenges
Outside of certain markets like the U.S. that are seeing continued growth (as more states legalize pot), more mature markets like Canada that have allowed for cannabis sales for roughly seven years are seeing growth flatline. Market saturation, threats from the black market, and heightened competition for an already saturated market have led to deteriorating fundamentals for nearly all players in the Canadian market.
With the U.S. market seemingly off the table, at least for the next three years, investors in companies like Canopy need another catalyst to rely on for a bullish outlook.
In the absence of such a catalyst, this does appear to me to be a stock that’s worth selling right now.
