Table of contents:
- 1 Cannabis stocks: What is the truth about the cannabis stock trend?
- 1.1 Why do cannabis companies have such enormous growth potential?
- 1.2 What are the risks for cannabis producers?
- 1.3 After the hype came the disappointment: Cannabis shares grounded again after soaring
- 1.4 Many problems in the hemp industry
- 1.5 Why is cannabis legalized in many countries?
- 1.6 Situation in Germany: What problems and opportunities do German start-ups have?
- 1.7 The seven largest cannabis stocks in check: No. 1: Canopy Growth
- 1.8 Aurora Cannabis share in check
- 1.9 Hemp shares an overview of listed companies: Tilray as Big Player
- 1.10 Cronos as partner of the tobacco industry
- 1.11 Aphria, GW Pharmaceuticals and HEXO
- 1.12 Risk diversification: Invest in an index
- 1.13 Conclusion: Cannabis stocks in trend, but not sustainable enough?
Cannabis stocks: What is the truth about the cannabis stock trend?
What are the reasons for this and whether the cannabis industry will be able to keep its original promises after all, we have investigated for you. We put a special focus on the biggest cannabis stocks.
- Cannabis is legalized in more and more countries
- Great medicinal effect
- Most of the large suppliers come from Canada
- Stock market losses correct too high expectations
- Table of contents
Why do cannabis companies have such enormous growth potential?
Hardly any other market is considered to have such a huge growth potential as the cannabis market. Correspondingly big is the hope that many investors place in the most famous cannabis shares. Which market can actually be developed depends mainly on the legal regulations in the respective country. However, many countries are liberalizing especially with regard to cannabis in recent years.
Basically there are different strengths to regulate the market:
- Approval of medical cannabis
- Decriminalization of cannabis use and possession
- Legalization of cannabis while regulating the market
Germany is one of the largest markets for medical cannabis. This is not least due to the fact that cannabis is in principle considered reimbursable by health insurance companies. Currently, cannabis from the pharmacy costs around 450 euros per month. It is estimated that the number of patients will increase to one million in 2024. Accordingly, a market for medical cannabis in Germany would cost 450 million euros, whereas currently about 65,000 patients are registered. Whoever buys a hemp share is investing in this enormous potential.
The market potential would be even greater if legalized: According to estimates the consumption of cannabis is 200 to 400 tons, with a black market price of about 10 Euro per gram. Thus a legalization would open up a market worth billions, even if the demand for medical cannabis is already included in the calculation. The worldwide potential is estimated at 140 billion US dollars, with Europe alone accounting for 40 billion – in addition to the neighbouring country the Netherlands, which has a turnover of about one billion euros with cannabis.
What are the risks for cannabis producers?
Where to open a depotNo matter if Cannabis Science stock or Cannabis Wheaton stock: They all face the same risks. If the legal situation does not change for the better, but possibly even for the worse, (potential) markets will break away. Cannabis is an issue that is heating up the minds and often decoupled from its medical benefits. Thus it becomes a political issue. As a result, the business is associated with a certain risk.
This is all the more true with regard to the financial situation. The cannabis industry is very young. Accordingly, the economic foundations of the companies have been shaky so far. None of the larger companies has actually succeeded in making a profit over a longer period of time. As young as the industry is, it is highly competitive. However, the demand for high-quality cannabis is becoming a problem: there is virtually no experience in growing hemp on an industrial scale in medical quality.
However, the quality of the raw materials is an important factor for the branding of companies, especially now. Not only the patients suffer from poor quality, but also the young start-ups that have to make a name for themselves. Another important factor is the scarcity of raw materials.
Here, too, the legislation in many countries must be relaxed. In Germany, for example, cultivation has only been legal since 2020 and is strictly limited for the next four years. This also represents a limit for the growth of companies in Germany.
Cannabis shares experienced a big boom in 2017 and 2018. They became an insiders’ tip and most investors who focus on trends invested in this industry. The legalization wave in Canada and in many states of the USA provided a boost.
Hemp stocks became the darlings of the investors and could even multiply their prices in some cases. The industry became an important niche topic on the stock exchange and many invested in the trend shares. In the following year, however, some disillusionment already followed.
There was a wave of takeovers and cooperations. Many of the larger companies bought up the smaller competitors. At the same time they were looking for new opportunities to master sales, research and other challenges.
But in many cases the companies were not able to meet the expectations investors had of them. Due to worse quarterly results than expected, many shares fell into the red. In some cases, companies were also put under strong pressure by their cooperation partners because the desired results did not materialize.
So the cannabis industry has already had its first minor crisis. One of the big challenges is to show sufficient growth, although this is almost inevitably strongly limited. This is not least caused by the high restrictions in production, which is not only a problem in Germany. In many countries it is currently still a kind of test phase, which makes it much more difficult to exploit the market potential.
Many problems in the hemp industry
In principle, a loosening of the previously quite strict policy of prohibition seems to be emerging, especially in Western countries. At the same time, the authorities do not always appear to be well prepared for this. It seems complicated to find a middle course between too much regulation and too weak legislation. Germany, for example, cannot meet demand with domestic production, at least not in the medium term. In Canada, on the other hand, too little regulation has led to products of inferior quality coming onto the market.
At the same time, there are too few licensed sales outlets in almost every country. Or there are problems with the prescription of the drugs – in Germany, for example, there are some “THC doctors” who are known to prescribe cannabis as a drug if it is a sensible therapy. It is also very complex for the doctor to prescribe the drug.
Also in other countries there are such restrictions, so that the strong regulation is of course another factor that has a significant impact on the development of hemp stocks. However, a big problem is and remains the black market.
In countries where cannabis as a drug is not paid by health insurance companies, medical hemp is considerably more expensive than hemp from the black market. Even in Canada, one gram is almost twice as expensive when purchased through official supply channels. This makes it correspondingly unattractive in countries to buy cannabis through regulated outlets: First the medical need has to be proven in order to pay higher prices.
Why is cannabis legalized in many countries?
This development is not least due to the fact that the medical use of cannabis seems to have several advantages. For example, it is currently under discussion as an active substance, especially for the following diseases:
- Chronic pain
- Multiple Sclerosis and Paraplegia
- Side effects of chemo- or viral therapy
In addition, various other diseases and symptoms are under discussion for which the effectiveness still needs to be researched. Especially in the psychological field, however, there could be some more potential applications.
Especially anxiety and sleep disorders, Tourette’s, ADHD and alcoholism could be alleviated with medical cannabis. Corresponding studies are currently being conducted. It remains to be seen how great the effect will actually be. Cannabis as a therapeutic agent could also be excluded for some diseases. For example, depression, psychosis, dementia and glaucoma cannot be alleviated with cannabis.
In comparison to many other therapeutic options, cannabis is said to be very gentle and ultimately cheap. Moreover, the side effects are kept within limits with high-quality cannabis and an exact dosage.
Some countries have also decided to legalize cannabis for other reasons. For example, although cannabis is one of the most common gateway drugs, this is not insignificant because it is illegal. It is through the use of cannabis that many first gain access to the structures.
Another important factor is the market. The legalization of the soft drug can pour considerable sums into the state coffers. Accordingly, many countries are examining whether legalization is appropriate and to what extent.
Situation in Germany: What problems and opportunities do German start-ups have?
One of the biggest challenges facing German companies at present is the mismatch between demand and raw materials. Only hemp from a few countries can be considered for further processing in Germany. The source that is used most often is the Dutch cannabis agency OMC. However, in July and August it could only distribute ten kilograms of cannabis per dealer and company.
Of course, German companies can also use other sources. However, only the Netherlands and Canada are officially considered safe countries for cannabis production, and in Canada the market is currently also growing very strongly. For hemp from other countries, however, an export permit is required.
What presumably every German cannabis stock will benefit from in 2020 is the fact that the BfArM in April and 2019 closed a tendering procedure in which the cultivation of 10,400 kg was granted for four years. Ultimately this is only just over 200 additional kilograms per month, but it will help to ease the bottleneck a little bit. The first cannabis from German cultivation will probably be available in the fourth quarter of 2020.
In fact, wholesalers may not benefit as much as investors assume. The Cannabis Agency sells cannabis from Germany first to pharmacies and only surplus to wholesalers and manufacturers.
Thus, cannabis manufacturers from Germany currently face the problem of not being able to meet demand with the raw materials offered. Nevertheless they have to invest in order to be able to prevail against the competition at an early stage.
The seven largest cannabis stocks in check: No. 1: Canopy Growth
Canopy Growth is considered the largest company in the cannabis industry. The Canopy Growth stock is accordingly popular. Many investors assume that the industry leader will be able to prevail against its competitors even in this difficult phase.
The company is based in Ottawa, Canada. Recently it made the headlines in Germany in particular because the company made some interesting purchases in this country. These include:
Storz & Bickel, a Swabian manufacturer of vaporizers (purchase price 145 million euros)
The cannabinoid division of Bionorica C3 in Neumarkt and Frankfurt (purchase price 226 million euros)
Canopy Growth is therefore likely to establish a flourishing business in Germany as well. With a turnover of 78 million Canadian dollars, the purchase price is of course no mere cardboard stick.
They were made possible not least by the main shareholder Constellation Brands, which holds around 38% of the company. This is a beverage producer and the largest wine company in the world. It is the largest supplier of alcohol in the USA. However, Constellation Brands is less concerned with gaining a foothold in another market. Instead, the beverage company wants to work with Canopy Growth to develop and market primarily hemp-flavored beverages.
In Germany, the Aurora Cannabi share is often in the spotlight. This is not least due to the fact that the company won the tender for the allocation of cultivation capacities and is now allowed to grow cannabis in Germany together with two other companies. However, the Aurora Cannabis share does not even make a small jump up after the announcement.
Instead, the news that the company will in future be allowed to grow a ton of hemp in Germany could not stop the further decline in the share price. On the contrary, the share price even dropped dramatically. last year the share price dropped from 8 Euro to below 0.70 Euro. Reason for this is however no clear loss in value. Instead, it is above all always new capital increases that ultimately drive the share prices down.
The performance of the Aurora Cannabis share is thus almost typical for the industry: with comparatively little room for manoeuvre in developing markets, a constant capital increase is necessary to finance takeovers, investments and diversification. Whoever invests in cannabis shares should be aware that it is a completely different market than the one they usually cover with their shares. Companies are also still far from paying dividends. This is all the more true because the companies are still far from making a profit. At the same time, however, sales are increasing significantly.
Among the cannabis stocks, Tilray is one of the best known suppliers of cannabis products. A look at the balance sheet clearly shows why the industry is currently so popular among shareholders. Tilray more than doubled its turnover from 2017 to 2018 from 20.54 million US dollars to 43.13 million US dollars. Even more impressive, however, is the increase up to 2019: at $167 million, the company has almost quadrupled its revenues. Hardly any other industry can record similar growth rates.
Tilray, unlike some other companies in the industry, focuses on the production of medical cannabis and also participates in research and studies for this purpose. The marketing focus is therefore also clear: Tilray does not present itself as a lifestyle product, but positions itself clearly on the market as a manufacturer of medicines.
So it is certainly no coincidence that Tilray was the first stock from the cannabis industry to make it to the American NASDAQ. The company was also the first of its kind to be GMP-certified and allowed to supply medical cannabis for studies in the USA.
The company is also based in Canada and was founded there in 2013. It is now active in many countries. The company supplies the European Union from Portugal. Tilray has entered into a partnership with Novartis for the sale.
Cronos as partner of the tobacco industry
Cronos is one of the hemp shares that investors should keep an eye on, not least because the company cooperates with the tobacco manufacturer Altria. The company invested as much as 1.5 billion US dollars in order to have a 45% stake in Cronos in return. Many market observers see this as a very targeted attempt to establish itself on the US market. CBD products in particular are to be sold much more strongly in the USA.
As a large tobacco manufacturer, Altria naturally has the necessary means and infrastructure to take Cronos even further in this area. In addition, market observers assume that Cronos plans to establish a hemp plantation in the USA. At the same time, Altria naturally also enables international distribution.
Anyway, the Cronos share shows very well how great the potential is and how little the actual performance has been so far. For example, the company’s market capitalization at times exceeded five billion US dollars, with sales of only 50 million US dollars. Such figures are absurd for a company that is not operating in such a growth market.
Cronos also originally comes from Canada. The company is now represented on four different continents. Many market observers expect the company to become one of the most important suppliers of cannabis, especially in the US market.
Aphria, GW Pharmaceuticals and HEXO
Two other important cannabis stocks are HEXO and Aphria. These two companies are also from Canada. With GW Pharmaceuticals, only one European company is in the top 5 of cannabis shares. GW Pharmaceuticals is another producer of medicinal substances derived from cannabis. So far, it has focused primarily on pain relief and epilepsy.
Aphria excels in the cultivation of cannabis plants. It is one of the largest breeding companies worldwide. The company is licensed to do so not only in Canada but also in Germany. The greenhouse in Neumüster is scheduled for completion in 2020, the acceptance is guaranteed by the Federal Ministry of Health. In addition, the company has taken over CC Pharma GmbH, which is primarily an importer and supplies around 13,000 pharmacies in Germany.
Like Aphria, HEXO was founded in 2013, but its IPO did not take place until 2017. The company is still largely unknown in Germany and not all too present in this market. In contrast to many other companies, HEXO also has lifestyle customers in its sights. Thus, HEXO not only produces medical cannabis, but also sells THC as oil or spray, which often rely on an effective combination of THC and CBD.
Risk diversification: Invest in an index
Basically, there is certainly no doubt that the market for medical cannabis in particular has a significant growth potential. However, it is unclear which companies will be able to hold their own against the competition in the long term. These are very young companies that have yet to prove that they can even make a profit. However, the risk also becomes so high because some of the stocks on the stock exchange were valued as if they had already been making profits for several decades.
Now a significant correction has arrived in 2019, which in any case has continued into the first months of 2020. After the high share prices could be seen as advance praise, a somewhat more realistic assessment is currently emerging. However, the low age of the companies makes it almost imperative to spread the risk between the individual shares. At the same time, investors should not take too much risk and understand the cannabis sector as a trend topic. That means at the same time a small admixture in the Portfolio in relation to the broadly strewn portion of the capital.
Fortunately, there are some ETFs that cover the cannabis industry and thus allow a broad diversification:
- The Medical Cannabis and Wellness UCITS ETF (WKN: A2PPQ0)
- Rize Medical Cannabis and Life Sciences UCITS ETF (WKN: A2PX6U)
- ETFMG Alternative Harvest ETF (WKN: A2DGUJ)
Conclusion: Cannabis stocks in trend, but not sustainable enough?
Medical cannabis is a significant growth market, which is becoming more and more important due to the deregulation and legalization of cannabis. The reason for this is not so much a rethinking of THC and its drug status. Instead, the medical benefits cannot be denied. That is why more and more health insurance companies in Germany are paying for therapy with active ingredients derived from hemp.
Germany is only slowly opening up the market, Canada and also some states in the USA have already done so some years ago. Therefore, the absolute majority of the more important companies are in Canadian hands. The industry has experienced a very significant boom until 2018, during which time many of the young companies received billion-dollar ratings. So far, however, they still owe the promise of being able to operate profitably at all. Significantly lower black market prices and restrictions imposed by the authorities make life difficult for them. With falling share prices, they are also becoming takeover candidates for pharmaceutical companies.
However, the market is without question very exciting and allows for considerable growth. Many of the current problems will probably be solved in the long run. Accordingly, an investment can be profitable in the long term, especially now in a consolidation phase. Whoever does not dare to bet on the right stock can also invest in the entire cannabis industry via indices.