Why Cannabis Investors Should Brace for More Downside

Cannabis stocks enjoyed a 10% surge on the first day of trading in 2020.

This will prove short-lived, so investors should brace for a more near-term downside.

Just as 3D printing or the oil boom nearly a decade ago broke apart due to excess debt and over-supply, the same is happening for cannabis. The sector enjoyed too much money flow, forcing companies to invest in capital buildings to increase output.

Yet the illegal cannabis market, along with excess supply from legal channels, is putting downward pressure on prices.

The lower prices for cannabis will only delay profitability for established firms. Already, Hexo (TSX:HEXO) sold stock to raise cash and to avert bankruptcy. Aurora (TSX:ACB) halted capital expenses to conserve cash. But the big firms have facilities coming online and ready to increase output.

Fortunately, Ontario ended the lottery system that limited store openings. At 20 store openings a month and the rate increases after that, the legalized market will have increasing store presence. If the market can absorb the increased output without hurting prices, the decline in weed stocks will end.

Long-time investors are still in the green with profits and need only hold for three to five years for maximum gains. The supply-demand imbalances will squeeze out the weak companies. And those holding stronger companies like Canopy Growth (TSX:WEED) and Cronos (TSX:CRON) need not worry.