Why Cannabis Stocks Continue to Drop and What Might Turn Things Around

It’s been a tough year for cannabis stocks. While the overall stock market has seen modest gains, cannabis stocks are experiencing sharp declines and have hit new all-time lows. The Global Cannabis Stock Index has lost 70.4% of its value since January 2022 and is down 21.4% so far in 2023. The index has seen a 91.8% decline since its peak in February 2021.

Reasons for the Decline of Cannabis Stocks

The cannabis sector is facing a range of challenges. The run-up in 2020 and 2021 was driven by two factors that are no longer in play. First, the vaping crisis put pressure on cannabis stocks in 2020. Fortunately, the crisis had nothing to do with the legal cannabis industry, and demand for legal cannabis actually surged as people had more time, money, and stress. However, the pandemic created new challenges for the industry, as widespread lockdowns increased costs and made it harder for companies to bring products to market.

Another factor behind the decline of cannabis stocks is the slowing of growth due to falling demand after the pandemic spike. Additionally, access to capital has become limited, and investors are increasingly concerned about the industry’s outstanding debt. Institutional investors have been less active in the cannabis sector, and trading volumes are very low. There has been little M&A activity in the industry, and strategic investors have been absent; cannabis stocks need buyers.

What Might Turn Things Around for Cannabis Stocks

The cannabis sector requires significant investment, and one possible solution would be the ending of 280E taxation, which would have a positive impact on the industry’s bottom line. Another potential positive factor would be for cannabis companies to uplist from the OTC to higher U.S. exchanges, although there is currently no law that obliges exchanges to list federally illegal cannabis companies.

Strategic buyers may also step in and acquire Canadian LPs or American ancillary companies, as we’ve seen in the past with Organigram and Cronos Group. This kind of activity would boost investor interest and could help attract more institutional investment.

The Outlook for Cannabis Stocks

The cannabis sector is currently in a challenging position, and investors are cautious about the industry’s future. Although the stocks appear cheap, there is a lot of uncertainty, and the market can be treacherous in the short term. If you’re an investor with a long-term focus, cannabis stocks may be worth considering, but caution is advised.