Cannabis Stocks – Is this a repeat of Dot Com Bubble?

Cannabis-stocks-Bubble post at Theequitypodcast.com

Cannabis made many millionaires in 2017, 2018 and to some extent in 2019. Year 2017 was early and many cannabis stocks got the first mover advantage. Rightly so, given it was early and start of sector wide rush and speculation to “get in” as soon as possible before “The train leaves the station“.

Money started pouring in, from funds, from institutional and retail investors. Companies were able to raise millions, especially in Canada, since legalisation was coming closer. Many large companies started pouring billions of dollars in cannabis. Constellation brands invested $4 Billion in Canopy. Aurora cannabis acquired MedLeaf for $1.98 Billion and so on. This list is long, so we better cut it short here…….

Overvaluation in Cannabis Stocks sets in….

Many junior companies were trading in dollars even before first penny of revenue came in. Many companies from other sectors “changed business” and became a cannabis company overnight. It was funny and sad to see every mom and dad investor running after cannabis stocks. On the other hand general equities have been sold to buy cannabis.

Cannabis stocks were getting the most coverage, most likes, most shares on all social media platforms. Companies were happy, promoters were happy and larger section of investors were also happy. Everyone was making money and almost every cannabis stock was in demand. Despite this, many in the know how sensed the situation and sold out and locked in real profits.

Then came Legalisation

……….and what happened after that is a complete different story.

A story that many investors, who bought cannabis stock(s) in extreme speculation around the top don’t want to hear. Story that is getting cuts and corrections every day and a retake is not helping. A story that is causing nightmares to many young investors. It is the end of 2019 and we are in the midst of massive correction in the cannabis sector. Majority of the stocks have lost 50% – 75% of their market cap since the Heyday (Hay Days). Young minds are asking, Is there a bottom yet.

Why are Cannabis Stocks hurting so bad?

Let’s go through this in one flow….

  • Speculation created extreme Hype.
  • Hype created Interest.
  • Interest created greed.
  • Greed turned into extreme desire.
  • Above combination Ignored all the usual metrics.
  • P/E, EBIDTA, Cash Flow thrown out of the window. Who cares….?
  • This hype compelled a normal investor to open his cheque book.
  • Many didn’t cared for the price they paid for their cannabis stocks.
  • Bought at the top and the correction started.
  • People in the know how bailed out.
  • Market started to cool down.
  • Then came the average down part.
  • Someone shouted !! Hold on to your shares, it’s the bottom.
  • Sector went down further.
  • Panic sets in.
  • It started to HURT HERE!!

Above is the simpler form of a flowchart, without a chart. Just like dot com bubble, the hype ignored all the usual metrics. “Growth over Profits” was the norm in 2018 and 2019. Although Industry experts were warning about this correction since long. But who listens……?

Cannabis Stocks – Is this a repeat of Dot Com Bubble?

To understand and correlate, let’s first go through the dot com bubble 1 and crash and how it happened. Let me take you back to the 90’s first. People were getting used to computers and many households were planning to buy their first computer and connect it to world wide web. Internet was growing rapidly. People started talking about WWW or .com.The hype started building and the interest was setting in. A new buzz, a .com buzz started and people were getting excited.

Money started flowing in to these “Internet” companies. It was very easy to raise money for the business related to “Internet” or .com. Big banks, funds, investors all want to be a part of this big Internet revolution and started investing large money in these .com companies. The companies and the promoters had a great time. Companies knew that some type of hype need to be created for a normal investor to open his/her cheque book. There comes the advertisement part and it was done at highest pitch.

Overvaluation in .com internet companies sets in….

Many investors overlooked traditional metrix. Companies went over 1000% on speculation alone. Many mom and dad left their jobs to put money in these “internet” companies or the .com companies expecting better returns than their jobs. People were handed stock options and they became instant paper rich. Companies had huge spending budgets. Billboards, advertisements were taking the centre stage.

Speculation was building with each passing day. Markets peaked in early 2000. Extreme speculation sets in……..and…….

Came the Dot Com crash

…….And this crash got written in the story books forever.

This crash took some time to unwind. During this time the investment started to dry up, People started selling these “internet” companies, Many companies lost more than half of their market caps. Extreme speculation turned in to panic. “Growth over Profit” terminology was soon deleted. Many smaller companies vanished from the screen. Many big companies had to cut down. Today’s giants like Cisco, Qualcomm , Amazon, eBay and many others went down significantly but somehow survived that crash. And in the end few emerged victorious and gave birth to many of the giant corporations that are ruling the Investing world today.

Let’s get back to Cannabis Stocks

Without any doubt, Cannabis sector has similarities of dot com era.

Massive speculation, Just like dot com era
New (Cannabis stock) company came up everyday, Just like dot com era.
Too much hype created, Just like dot com era.
Billions poured in, Just like dot com era.
Every mom and dad investor started talking about Cannabis, Just like dot com era.
Investors Ignored usual metrics, Just like dot com era
Majority of the companies got overvalued valuations, Just like dot com era.
Companies spending budgets increase many folds, Just like dot com era
Lot of free options in the transactions, Just like dot com era

…..Many more, but let’s keep it short…..

What went wrong with majority of Cannabis Stocks?

Most companies ran on hype alone and got the valuations they never deserved at first place. Most of the companies started chasing the same small market of recreational weed. They created huge green houses and over produced. Production increased many folds and created huge supple, but the demand remained same, which was also catered by the black market to a large extent.

Sales figures did not lived up to most companies expectations and the industry insiders sensed the situation and bailed out. New investments dried up. Big funds and institutions went to sidelines. Companies missed their own expectations and lay’d off people and the black market still there. Federal U.S legalization does not seem to be happening anytime soon and it’s not easy for banks to invest in this sector.

Is Cannabis here to stay?

Without any doubt, Cannabis is here to stay. Medical part is not going anywhere. So what will it take for the cannabis companies to survive this correction ? It is simple from now on. Just like the DOT COM bubble and the eventual burst, this cannabis sector may have few survivors and few winners. We have seen few great companies emerge from that dot com era, we may see something similar here in Cannabis sector too.

It’s not all over for cannabis companies and few in the industry have started to think that there is a now a great time and value in investing in few good names when they are down two third of their value they were a year ago. But they are looking on the U.S side where cannabis is federally illegal and the process to get it federally legal seems be too slow. Two third of Americans want cannabis to be legal at the federal level but no one knows when that will happen.

Who will survive this downturn?

Institutional investors seem to be on the sidelines. New money is not coming in. As a matter of fact, the money is leaving cannabis stocks. So who will really survive this downturn ? Only few companies that will pull the plug on their spendings, cut expenses, create balanced products based on the market and those who execute well from this point on.

Since hype and speculation is over in this sector, the usual metrics will dictate the price of a stock going forward. P/E, EBIDTA, Cash Flow, Profits and all those traditional metrics will return back and dictate who will emerge out of this correction and who will be the next Amazon from cannabis sector.

There are few cannabis companies that are expected to do really well in 2020 and beyond. Good management, proper execution and profitability will be the key. Pick your companies, we are picking our’s !!

Disclaimer:

Information for this blog post was taken from various online sources. Always do additional research and consult a professional before purchasing a security. Theequitypodcast.com is only a publisher of content and not a registered financial adviser and do not hold any license. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision. None of the information contained in this website should constitute a BUY or SELL recommendation. Please read Disclaimer and Terms and Conditions.

Referenced Sources
  1. https://en.wikipedia.org/wiki/Dot-com_bubble
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Amit is the founder of Theequitypodcast.com. A happy person, a web enthusiast and currently focussed on everything associated with running a Website, Blog and a Podcast. Also contributing to other online Blogs with articles and guest postings.

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