Two negative events last week sparked another round of selling in cannabis stocks. Hexo (NYSE:HEXO) pre-announced weak results and withdrew its 2020 outlook. More news of several hundred suffering from vaping, and probably CBD-related, scared off investors. At this rate, investors are better off betting on Altria’s (NYSE:MO) rebound than to hold cannabis stock.
Hexo pre-announced revenue growth doubling. This is slower than expected, due to what management said was lower than expected product sell-through. The sharply lower demand is a setback for the industry. Speculators bet that infinitely high demand would continue forever.
But now, cannabis suppliers who invested hundreds of millions in manufacturing or company acquisitions will have supply coming online.
A huge glut in cannabis is in the making. Investors cannot time the supply-demand equilibrium returning. Instead, they are selling Cronos (TSX:CRON), Canopy (NYSE:CGC), Tilray (NASDAQ:TLRY), and Aurora Cannabis (TSX:ACB) stock first.
Canada’s regulatory framework is hampering the rollout of cannabis. The segment now suffers from an imbalance in oversupply, which will get worse over time.
Canada must increase the number of storefronts to speed up delivery of the product to customers. And while unlikely, other countries must legalize cannabis. If these events do not happen soon, then the billion-dollar cannabis firms will continue underperforming.
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