Ask Our Experts 2/10/20: Cannabis Stocks Outlook for 2020
Q: After a rocky 2019, what is to be expect for cannabis stock performances in 2020?
By New Frontier Data
A: Certainly, 2019 was a rough year for cannabis stocks. The ETFMG Alternative Harvest ETF (an exchange-traded fund and proxy for the public cannabis sector) lost more than half its value over the course of 2019. Losses were largely attributed to ongoing challenges to curb illicit sales in the Canadian market, where the largest public cannabis companies operate.
Many industry stakeholders are hopeful that the close of 2019 saw the bottoming-out for public cannabis stocks which they expect to rebound in 2020. According to data from Viridian Capital Advisors, there are already positive signals coming from raises of industry capital during the start of the new year. In the first two weeks of 2020, there were seven capital raises worth a total of $250 million. Although the number of deals was lower than the 15 done in the first two weeks of 2019, the average deal size was more than 2.5x larger than the same period last year, suggesting that the recent poor stock performance of the cannabis sector has not dampened long-term outlook for the potential of the industry.
Additionally, 2020 is a presidential election year, and there are cannabis-legalization measures on the ballot for either medical or adult-use programs in 19 states. If all states were to pass their respective measures it could add$11.5 billion in annual cannabis sales revenue by 2025. A similar level of potential expansion was seen in the run-up to the 2016 election, which included California’s adult-use passage. Following the sweeping success of all but one of the cannabis measures on the 2016 ballot, the public market saw huge gains in related stocks. Similar momentum is expected to follow in November 2020 should only a fraction of the states’ measures pass. Also similar to 2016, however, there is significant risk of irrational exuberance as potentialities presented by new legal markets can be too quickly conflated with immediate business opportunities.
The expansion of legalization represents a significant opportunity in the long term, but state regulators hold the respective keys to their markets’ realization of any profits.