There is no denying that this year has been rough for marijuana stocks.
After last year, when investors put $10 billion into the new sector and drove share prices higher and higher, it was bound to happen.
You don’t have to look any further than the ETFs that have popped up. The more established ETFMG Alternative Harvest ETF is down around 20%. Some of the ones that debuted this year are down as much as 45%.
But those numbers are starting to mask a rotation that not only shows that the sector could make a dramatic turnaround, but is also attracting a new type of investor.
Value investors have a unique opportunity in a sector that has been all about explosive growth to date, and it looks like the savvy ones are making moves.
First, we have renewed interest in the sector as a whole. That is apparent from an uptick in investor money coming into it.
As Pat Keon, a Lipper senior research analyst, noted, “ETFMG Alternative Harvest ETF has taken in just over $500 million in net new money for the year to date, which accounts for over half of the ETF’s current assets under management of $800 million.”
Essentially, this has become a large rotation, as existing investors sell shares to a new wave of marijuana investors.
With short-term outlooks mixed and middle- to long-term outlooks as strong as ever, this most likely represents an influx of investors with a more patient outlook.
As for those short-term outlooks? They mostly have to do with funding. The indiscriminate decline across the board has put many companies in a position where they will have to raise money at unfavorable terms.
That also creates an opportunity for investors who can do the due diligence and find the ones that aren’t burning cash as quickly or have enough to weather it out.
Alan Brochstein summed it up well in an article for Forbes:
“Many companies won’t make it or will have to raise capital on extremely unfavorable terms that will substantially dilute shareholders, as they aren’t adequately capitalized. Investors are quickly figuring this out, and the broad selling has certainly hurt the companies with high cash-burns and weak balance sheets the most.
“With that said, the aggressive selling over the past seven months has impacted companies that appear to be adequately capitalized as well. The cannabis industry has attracted many growth investors over the past few years, but the steep decline across the board has left some companies that I think should appeal to value investors.”
Of course, the devil is in the details, and the details are challenging to interpret.
While the baby has definitely been thrown out with the bathwater, value investing takes a lot of time, effort, and expertise.
The headline metrics, like price to earnings, EBITDA, and so on, simply aren’t enough on their own.
It takes a deep knowledge of what the companies are doing and how it will pan out over time.
No company will say in a quarterly presentation that it is about to dilute current shareholders into oblivion. But companies do that all the time.
A lot of companies in the marijuana sector are going to do it unless their share prices shoot up overnight.
Now is a fantastic time to get into the sector and be part of the rotation that is bringing value investors to marijuana stocks.
Just do yourself a favor and make sure you have the best information available.
