No one ever likes to call a bottom, but that seems to be where Matt Markiewicz's head is at these days with regards to cannabis stocks. He is the managing director of the recently formed Cannabis exhange-traded fund THCX (THCX) that trades on the New York Stock Exchange.
Cannabis stocks have been in a tailspin since April. Partly joining in the broader market as equities slipped in April as well. But the S&P 500 made a recovery and as of last week is up 15.2% for the year. Cannabis stocks did not join in the recovery and have continued to tumble as earnings have been mixed-to-disappointing. Add to the mix a scandal concerning CannTrust (CTST) and word that the FBI was interested in investigating cannabis companies made new cannabis investors nervous.
S3 Partners wrote Wednesday, Aug. 14, that, "Short sellers in the sector have not fared that well, down $951 million in year-to-date mark-to-market losses in the top 20 most shorted Cannabis stocks before today's trading. Today these short sellers have recouped their August losses, up $269.1 million in daily mark-to-market profits and now up $11.7 million for the month of August, but still down -$681.9 million year-to-date 2019."
Markiewicz has kept his eye on the shorts.
"The shorts are backing off because they did so well this week," he noted. To him this may be a sign that pessimism could be waning.
S3 also wrote that, "Short selling is fairly concentrated to a handful of names, with the top 20 shorts making up over 85% of the total shorting executed in the sector."
CannTrust, which has been slapped with bad news concerning its failure to keep its facilities in compliance with Health Canada regulations could go to zero in Markiewicz's opinion.
"I want to see Canopy Growth (CGC) start to recover," he said. To him, that signals the end of the bottom.
Mitch Baruchowitz of Merida Capital Partners also believes the sector is nearing a bottom, but for different reasons. He concedes that when looking at indexes, stocks are low, but still cautions that weak performers could continue to fall. He actually thinks that large capitalized Canadian companies are overpriced, but he did point to three things that support the idea that a bottom has been reached.
First, he thinks that much of the current stock activity can be blamed on retail traders who typically day trade.
"They have short attention spans and are looking for short term results and might have expected some type of federal movement on legalization or descheduling by now," he said. "Since they didn't get that catalyst or they got burned while trading, they have moved on."
Second, Baruchowitz said that sophisticated cannabis traders had shifted to investing in private companies that develop into public companies, because of the tumbling stock market. That feeds upon itself, pulling potential buyers away. "As that private capital cycle slows, cashed up companies can execute and drive revenues which will eventually move stocks," he said.
Finally, he noted that the growth curves of the better executing multi-state operators should go vertical from the third quarter of 2019 into the second quarter of 2020, which will drive higher equity valuations.
Potential catalysts on the horizon that could light the fires of buyers are slim in the near term, according to Markiewicz. Still, he suggested that several large outstanding proposed mergers could close sparking interest. Plus, if the Food and Drug Administration issues some clarity on CBD in the fall, that could also bring buyers back to the table. Then again, bargain hunters may feel they don't want to wait too much longer to reenter the space.
Looking ahead, Canada's vape and edible sales will begin in December, which is too late for the fourth quarter but could prove to be a boost to first quarter 2020. Massachusetts' numbers continue to grow, and Michigan's sales, in a best case scenario, could begin by the end of the year. So while the catalysts are there for the fall, buyers might be rewarded mightily in 2020.