Most marijuana stocks have taken a beating in recent weeks. The Horizons Marijuana Life Sciences Index ETF (HMLSF -0.61%), which includes over 50 top pot stocks in its holdings, is down more than 20% from its peak in January.
This dismal performance isn't only a result of continued challenges in the Canadian adult-use recreational marijuana market. There's another factor behind marijuana stocks' latest downturn -- the coronavirus outbreak. Why would the spread of a new virus cause problems for pot stocks? Here are two key reasons.
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1. An ebbing tide lowers all boats
You've probably heard the old saying that "a rising tide lifts all boats." Well, an ebbing tide lowers all boats, too -- or at least most of them. I know I'm mixing metaphors here, but it's difficult for any stock to swim upstream when the overall market is tanking. This is especially the case for any stocks that were relatively weak in the first place.
Make no mistake, marijuana stocks were weak even before the initial cases of the coronavirus-caused COVID-19 disease made headlines. The lack of enough retail cannabis stores in Ontario continues to weigh on growth for Canadian cannabis producers. Most of the companies remain unprofitable. Some, particularly Aurora Cannabis, have significant debt loads.
But it's not just Canadian cannabis companies that face significant problems. The health scares related to vaping have caused shares of some U.S.-based marijuana stocks to fall. KushCo Holdings (KSHB), for example, derived 61% of its total revenue in fiscal 2020 Q1 from vape products. The concerns about vaping were taking a big toll on the stock well before the coronavirus epidemic raised its ugly head.
This preexisting weakness made marijuana stocks especially vulnerable when the broader market nosedived. It's not surprising that the Horizons Marijuana Life Sciences Index ETF fell more than twice as much as the S&P 500 index.
2. Products made in China aren't being made in China
The coronavirus outbreak started in China and has affected the country more significantly than anywhere else. With the Chinese government taking aggressive actions to control the spread of the virus, the manufacturing activity in China has been negatively affected.
How does this affect marijuana stocks? Many cannabis vaporizers are made in China. Other products used by companies in the cannabis industry, including product packaging and specialty equipment, are also made in the Asian country. Because of worries about the coronavirus, some of these products made in China aren't being made in China at the same levels as before.
The stocks most affected by this Chinese manufacturing disruption are those of companies with the most dependency on vape-related sales. Since the Canadian market for vape products only launched recently, it's U.S. cannabis stocks that have been hit the worst.
KushCo especially stands out. Its shares are down more than 30% year to date, a much greater loss than the Horizons marijuana ETF. Before the coronavirus panic set in, KushCo stock was actually up more than 20%.
A notable exception
There are always exceptions to the rule. Not every marijuana stock has been hurt by the coronavirus threat. Innovative Industrial Properties (IIPR 1.10%) stands out as a notable exception. The company's shares have risen so far in 2020 even with the overall market sinking on coronavirus worries.
It helps that Innovative Industrial Properties doesn't sell any products made in China. Actually, IIP doesn't sell any cannabis products. The company ranks as the largest real estate investment trust (REIT) focused on the medical cannabis industry.
Also, IIP's revenue stream isn't affected by consumers staying home because they're afraid of being infected by the coronavirus. It makes money from long-term leases to medical cannabis operators. This revenue flows in month after month regardless of what's going on at the macroeconomic level.
During times of uncertainty, stocks like Innovative Industrial Properties are good ones for investors to turn to. They're largely insulated from many of the kinds of issues that can cause other stocks to decline. If you're looking for a coronavirus safe haven, this marijuana stock appears to be a good option.
