The rapid spread of the SARS-CoV-2 coronavirus and the resulting COVID-19 disease have crushed the financial markets. This goes double for marijuana stocks, which have been hit particularly hard. Over the last month, for example, Canopy Growth has lost 33% of its value, and Curaleaf Holdings (CURLF 1.84%) has cratered by nearly 35%. Both are much harder falls than the 17% drop of the S&P 500 index.
As with any deep sell-off, this raises the question of which cannabis stocks -- if any -- are now too cheaply priced to ignore. Let's dive in.
Image source: Getty Images.
Reasons to be fearful
Marijuana stocks have been especially crushed during the coronavirus panic for a number of different reasons. Among the most significant is that they were already a risky proposition -- it's still rare for any of them to turn a profit on a consistent basis. This, despite the now fully legal market in Canada and the legalization wave currently rolling across American states.
Another worry is financing. With the hit that the global economy is sure to take no matter how the coronavirus story ultimately plays out, there will certainly be less investment channeled into speculative asset classes, a category that pot stocks fall into. Given their lengthening history of losses, cannabis companies were finding it difficult to drum up new sources of investment even before the coronovirus outbreak began.
Also, there's a fear that the deep impact the coronavirus will have on China's economy will be felt throughout the marijuana industry. That's because, like other sectors, cannabis utilizes products made in that country -- particularly in the vaping segment, since many vaporizers and related materials are produced there.
Finally, for some there is the creeping disquiet about consumer spending. In a slumping economy, it stands to reason that the ordinary Joe or Jane will rein in their buying of non-essential goods. Recreational marijuana can hardly be considered essential, even for those who like to consume on a regular basis.
Contained damage
I think all of these fears are overblown. Yes, the legal environment in the U.S. still isn't ideal, but the dominoes continue to fall with more states moving to sanction at least medical marijuana for their residents.
If a Senate and/or a president more favorable to full cannabis legalization at the federal level is voted into office this November, we could see a dramatic improvement.
I'm not particularly worried about the economic slowdown in China crippling the North American weed industry. There are numerous ways to consume cannabis, and many of them don't involve fancy equipment made across the Pacific. More to the point, product sold on these shores is grown, processed, and distributed here. Unless the current outbreak widens and deepens considerably, I doubt domestic production will be too badly affected.
As for consumer spending, we should keep in mind that for the typical medical cannabis user, marijuana is not a luxury -- it's a critical element of their care. As for recreational consumers, unless they have a serious habit, their expenditure on weed likely isn't high compared to other non-essential goods. I don't see a serious risk factor, here.
However, the concerns over financing are more justified. Because pot companies are usually hungry for money and rarely net a profit, the industry as a whole is dependent on direct funding (whether it be from the issuance of fresh equity or the opening of new credit facilities). We have seen increased desperation here, evidenced by the onerous interest rates operators such as Cresco Labs and Curaleaf are paying on recent borrowings.
Buying through the panic
All of these factors balanced, I believe marijuana stocks are the victims of panic selling. The better ones should now be seriously evaluated as buy candidates.
Consider Green Thumb Industries (GTBIF 1.17%), for one. In its most recently reported quarter, EBITDA recently flipped nicely into the black, supported by a dramatic increase in revenue. Its relatively strong position in the hot Illinois market and other weed-friendly states (hello, Nevada!) bodes well for continued improvement. I also like that it isn't shy to raise financing through sale-leaseback deals on its properties.
Green Thumb's major partner in its sale-leaseback endeavors is another weed company many pundits are bullish on, Innovative Industrial Properties (IIPR 2.08%). I like it, too. This company is a marijuana property real estate investment trust (REIT), and as such it does not grow, process, or distribute cannabis on its own.
Rather, Innovative is a landlord for operators like Green Thumb. That limited-risk profile makes it one of the rare cannabis-related companies that's actually consistently profitable -- a main reason its share price hasn't fallen anywhere near as deeply as those of its peers. And as a REIT, Innovative pays a regular dividend that's yielding nearly 5%.
As ever, caution is advised when considering any marijuana stock. The industry is still very young, and it faces challenges on many fronts even when removing the scary factor of the coronavirus and COVID-19. However, at this point, the superior weed stocks are looking very attractive now -- too attractive to ignore, in some cases.
