Roughly one year ago, marijuana stocks hit their 2019 peak. In Canada, there was optimism given the upcoming launch of derivatives (e.g., edibles, topicals, vapes, concentrates, and infused beverages). Meanwhile, it was expected that a number of U.S. states would push forward with legislation to legalize recreational weed. Unfortunately, neither scenario played out as planned.
Since the end of March 2019, it’s been a precipitous and painful downtrend for cannabis stock investors, with many publicly traded companies losing anywhere from 50% to 95% of their value. To make matters worse, now the industry is dealing with the implications of the coronavirus disease (COVID-19), the lung-focused illness responsible for more than 471,000 confirmed cases worldwide and nearly 21,300 deaths, as of late night March 25 per Johns Hopkins University.
Just when you think it can’t possibly get any worse for the cannabis industry, something new always seems to crop up.
The North American marijuana industry was a mess well before COVID-19
Before I dig into the latest disappointment for the marijuana industry, let’s review some of the challenges North American pot stocks were contending with well before the coronavirus showed up.
In Canada, the primary issue continues to be regulatory hurdles and delays. For instance, Health Canada has struggled mightily to approve cultivation and sales license applications in a timely manner. The agency also wound up delaying the launch of derivatives by a full two months.
Likewise, provincial regulators in Ontario had been reliant on a lottery system to assign retail licenses. This resulted in a mere 24 dispensaries being open by the one-year anniversary of recreational weed sales commencing (Oct. 17, 2019). Ontario, Canada’s most-populous province, has since abandoned its lottery system in favor of a more traditional vetting process. Nevertheless, it’s going to take many more months before new retail stores open and provincial supply bottlenecks are resolved.
Comparatively, the U.S. cannabis industry has struggled to compete with black-market producers on price, with high state-level tax rates on marijuana to blame. In California, the largest marijuana market in the world by annual sales, cannabis consumers are being hit with an aggregate tax that might be near 50%. Taxation levels this high allow the illicit industry to thrive.
Additionally, Canadian and U.S. pot stocks are both struggling with access to financing. In the U.S., most banks are unwilling to provide basic financial services since marijuana is illegal at the federal level. Meanwhile, in Canada, marijuana is legal, but banks are unwilling to lend due to the deteriorating state of pot stock balance sheets.
In short, the cannabis industry was a mess long before COVID-19 reared its head. But make no mistake: the novel coronavirus is making things worse.
Four ways the coronavirus is making life tougher for pot stocks
Although cannabis has the feel of an industry that shouldn’t see much of an impact due to COVID-19 and the strict mitigation measures being put in place to curb its spread throughout North America, there are four ways it can adversely affect the industry.
First, there’s almost certainly going to be supply disruption. For example, when China had strict mitigation measures in place, supply for everything from packaging materials to vape pens declined for the North American weed industry. These supply issues could persist for a few months to come.
Second, there will be no large trade shows or conferences as long as the coronavirus is spreading. That means less of a chance to introduce new product on a broad scale, as well as to interact with other businesses. In effect, we could see less in the way of lucrative deal making.
A third concern is what COVID-19 will do to tourist destinations. The Nevada economy, for example, is highly dependent on tourism. As one of 11 recreationally legal weed states, it could take a severe hit until a treatment or antiviral option for COVID-19 is in place and people feel comfortable spending their disposable income once again.
Fourth and finally, there’s the possibility of shelter-in-place orders or quarantines hurting sales in areas where delivery might not be an option.
Kicking the cannabis industry while it’s already down
It’s just a laundry list of bad news for the cannabis industry — and earlier this week, it got even worse.
You see, late Wednesday evening, March 25, the U.S. Senate passed a $2 trillion stimulus package that’ll now work its way over to the House of Representatives and then, hopefully, to President Trump’s desk for signing. This stimulus bill is going to put up to $1,200 into the pockets of qualifying American workers (up to $2,400 for couples), including an additional $500 per child. It’s also aimed at propping up struggling industries with bailouts and providing loans to small businesses.
But can you guess which industry isn’t going to see a dime from this $2 trillion stimulus bill? Yep…cannabis.
The federal Small Business Administration, which’ll be overseeing a huge lending program under this stimulus plan, plainly noted this week that cannabis companies aren’t eligible for a dime because marijuana remains a federally illicit drug. The only exceptions to the rule are businesses that produce or sell hemp and hemp-derived products, which are protected by the passage of the Farm Bill in December 2018.
While it is possible that state and local relief options might be available for pot companies that have been adversely impacted by the coronavirus, the general consensus is that the federal government is kicking the cannabis industry while it’s already down.
Funding is in focus now more than ever
If there’s one key takeaway that needs to be laser-etched into the minds of marijuana stock investors, it’s that access to funding and cash on hand is now more important than ever. Without any sort of federal assistance, the industry is on its own, and only those companies with abundant access to capital are going to be in good shape.
For instance, while its capital raising hasn’t always been pretty, Cresco Labs (OTC:CRLBF) is now set to weather the storm. Prior to completing its acquisition of Origin House in January, Cresco Labs required Origin House to sell about $30 million worth of its stock to raise capital. In November, Cresco also wound up selling and then renting back two properties (i.e., a sale-leaseback agreement), raising $38 million in cash, and cancelled a proposed acquisition of privately held VidaCann to conserve cash. Lastly, Cresco Labs secured a $100 million credit facility in early February that can be doubled in size if both parties agree to it. In short, Cresco Labs is set and ready for California’s cannabis industry to find its stride.
The same could be said for Innovative Industrial Properties (NYSE:IIPR), which just so happens to be the company behind the aforementioned sale-leaseback agreement with Cresco Labs. Since Innovative Industrial Properties operates as a real estate investment trust (REIT), its costs are relatively low (aside from hefty asset-acquisition costs), and its cash flow is very predictable. Further, the company has the ability to sell its common stock to raise capital, which is a relatively common practice for REITs. Nothing short of a wave of multistate operator bankruptcies sweeping across the U.S. could disturb Innovative Industrial Properties’ growth trajectory.