Much like investors who have pulled back from the highly anticipated IPOs of 2019, many buyers of cannabis stocks and ETFs may want to think again before they hold out for better times and suffer a series of additional downdrafts. Despite the industry’s long-term prospects, some analysts have been cutting forecasts for cannabis sales and cash flow, expecting the underperformance to continue into next year.
Headwinds Into 2020
BMO Capital Markets was the latest this week to write a downbeat forecast on Canadian industry giants such as Canopy Growth Corp. (CGC), Tilray Inc. (TLRY), and Aurora Cannabis Inc. (ACB), expecting them to suffer negative cash flow into 2020 as they combat headwinds such as a shortage in retail stores and weaker than expected growth of new products like vapes and edibles, as outlined in a Barron’s report.
“Our industry forecast does not anticipate an acceleration in growth until Q2 2020,” wrote BMO Capital Markets analyst Tamy Chen in a note published this week. Chen rates Canopy, Aurora, Tilray and Aphria (APHA) at market perform even as she has an outperform rating on lesser known, smaller players including OrganiGram Holdings (OGI) and Sundial Growers (SNDL).
Cannabis ETFs also could see more downdrafts. The ETFMG Alternative Harvest ETF (MJ), a proxy for the cannabis market, has declined by 48% since March 19. The ETF and its component stocks aren’t extremely liquid, Barron's notes, which makes them vulnerable should big investors decide to unload their shares.
The short term outlook is not good. Chen is forecasting a 20% sequential decrease in revenue for the quarter ended September, citing her study of sales volumes recorded by Canada’s federal health agency. She adds that elevated inventories could lead to lower wholesale prices, likely to present another blow to cannabis producers in the first quarter of 2020.