It’s no secret that the cannabis industry has been under-performing for a while now. In 2019, short interest in cannabis stocks has risen 55%. That, coupled with a plague of vaping-related lung disease and death that’s sweeping the United States, has caused investors to shy away from an already wounded space.
For the last six months, the Canadian Marijuana Index has trended consistently downward. It was at a high of $110.67 on March 21 and reached a low of $46.46 on October 1.
That’s a huge warning sign for investors that their hopes for the cannabis industry might be going up in smoke. However, a more careful examination of the industry reveals that not every sector is suffering.
Recreational Cannabis Stocks are Struggling…
Last month, the world’s second-largest cannabis company, Aurora Cannabis Inc. (TSX:ACB) (NYSE:ACB), posted Q4 financial results that were weaker than expected. The company raised $98.9 million CAD for the period ending June 30, but analysts expected Aurora to post sales of $108.3 million CAD, based on its earnings preview from July.
A similar thing happened in August to cannabis retailer Curaleaf Holdings Inc. (CSE:CURA) (OTCQX:CURLF). Analysts expected revenue of $49.8 million, but the company posted net revenue of $48.5 million, with a $24.4 million net loss cherry on top.
Both cannabis stocks suffered price drops as a result. While there are several factors to blame the revenue misses on, an important one is the lingering popularity of the black market for recreational cannabis.
Reports have shown that, despite legalization, millions of citizens in California and Canada are still choosing to buy marijuana illegally. In Canada, the numbers could be as high as 40%.
Many analysts are saying the “green rush” that began last October with Canadian legalization is over. Companies are adjusting their revenue projections, and investors are tapering their expectations.
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… But Medical Cannabis Sales are Booming
Since the 2018 Farm Bill was passed in the US, low-THC, high-CBD hemp can be cultivated and sold all over the country. As CBD has a host of health and wellness properties, this has created its own promising market that has the potential to put Canada’s profits from legalization to shame.
According to a report from the Brightfield Group, the CBD market in the United States is on track to be worth $23.7 billion by 2023. This makes the health and wellness sector the most lucratively promising aspect of investing in cannabis stocks.
Perhaps the most significant catalyst for this is the fact that medicinal cannabis users tend to be a lot more reliable customers compared to recreational users.
According to the Motley Fool, medicinal users buy and consume cannabis at higher and more consistent rates, and they’re even more likely to purchase CBD derivatives such as edibles, beverages, oils, topicals, and concentrates.
Cannabis stocks belonging to companies like Charlotte’s Web Holdings Inc. (TSX:CWEB) (OTCQX:CWBHF) that retail CBD/hemp extract products stand to flourish while recreational brands continue to wither.
In late September, CWEB announced that it is going to begin selling CBD gummies in 738 stores across 45 US states. Based on the statistics quoted above, these kinds of products will capture the market in the way that recreational-focused dry flower products have not.
Then there are companies like Ovation Science Inc. (CSE:OVAT) (OTCPK:OVATF), which specifically target niche CBD wellness applications. In Ovation’s case, that means creating products for the skincare market.
Ovation’s flagship topical is currently the #1 topical cannabis product sold in Nevada dispensaries. That’s the kind of result investors should be relying on.
So, a message for investors: start thinking of cannabis stocks in terms of a medical and wellness revolution, not a recreational revolution.
Featured image: DepositPhotos © wabeno
