Marijuana stocks have had themselves an incredible run to begin 2019, and as a whole have been pretty much unstoppable since the start of 2016. Since this year began, through March 6, the Horizons Marijuana Life Sciences ETF, the first-ever cannabis exchange-traded fund, is up 58% year to date.
It’s pretty easy for investors to get excited about the pot industry, with 38% global sales growth predicted in 2019 by Arcview Market Research and BDS Analytics, and Wall Street investment banks like Cowen Group calling for $75 billion in global annual sales by 2030. Those dollars have to go somewhere, which suggests that the legal weed industry could have quite a few long-term winners.
The cannabis industry isn’t without risks
But the marijuana industry isn’t without risks. For example, the push to expand and keep up with peers has led to a lot of share-based dilution for North American marijuana stocks. Having minimal access to non-dilutive forms of financing (i.e., bank lines of credit or loans), most pot stocks have had to turn to the secondary market to raise capital. This means selling stock, options, warrants, or convertible debentures, which can adversely impact shareholders and drag down earnings per share (for profitable companies).
Supply has also been a pretty consistent problem in Canada and select adult-use U.S. states. In Canada, regulatory agency Health Canada is bogged down by cultivation license and sales permit applications, which has delayed new product reaching dispensary shelves and online stores. Meanwhile, in the U.S., rampant oversupply and regulatory red tape have led to the rapid decline in per-gram dried cannabis flower pricing in Colorado, Washington, and Oregon.
Another concern, which often flies under the radar, is lock-up expirations. When a company goes public, insiders (e.g., executives, board members, and pre-IPO shareholders) aren’t legally allowed to sell their shares for a period of 180 days. This “lock-up period” is to prevent fraud, whereby insiders of a newly public company immediately sell stock to an unsuspecting public for a profit, leaving the public holding the bag, so to speak.