There is a possibility of big surprises for cannabis investors who are expecting the sector to recover in 2020. In 2019 most top cannabis firms in Canada recorded declining trends. Irrespective of the fact that valuations may be seemingly low, it does not imply that they are cheap or worth investing in this year. There are suggested reasons as to why investors should not expect a tremendous recovery on cannabis stocks in 2020. These include and are not limited to:
Vaping Concerns May Undermine Valuations and Sales Numbers in 2020
Vaping, just like smoking, comes along with side effects. It is, therefore, crucial for the investors in cannabis stocks not to overlook any fact vaping related infections will come along with as per market trends. Problems relating to vaping not only make vapes wilder, but they can also as well impact on the growth rates of cannabis stocks similarly to how much investors are willing to offer for them. A new segment of cannabis featuring ingestible and edible products is now legal in Canada. A professional service company estimates that this entire cannabis segment in Canada will be worth CA$ 2.7 billion annually. That could act as a significant boost about the fact that an estimate for recreational and medicinal pot market is worth anywhere from CA$ 2.6 to 6.13 billion annually, excluding this cannabis 2.0 segment. Vaping related sales are said to constitute a higher percentage of the recreational pot. Therefore, vaping-related infections could weigh down those results, posing a negative impact on the stock price.
It is not easy to accept that stocks that have dropped by more than 50% are still expensive, but investors have to admit that. Cannabis has been overvalued for quite long, making it hard to tell anymore what reasonable multiple looks like. This happens irrespective of the decline in stock value. Therefore it acts as a disadvantage to the investors as you will have to spend much on a product with unfavorable stock values.
Arising of Different Kinds of Supply Issues
Since the legalization of recreational cannabis in Canada, a key point of concern has been the lack of adequate supply. However, with the emergence of new suppliers and increased stocking by the existing ones, it might prove just very difficult to realize profits. In respect to this, analysts predict that the prices could drop further as there is adequate supply. If that is the case, company margins will definitely drop further rather than improve. This sounds a warning towards investors to be careful about which stocks they are investing in as 2020 is foreseen to be another challenging year. Therefore investors should carefully analyze the financial health of cannabis stocks as well as their profitability likelihood before investing in them.
In conclusion, cannabis stocks are expected to continue posing challenges this year. Therefore before making any stock investments, an investor should conduct a feasibility study to be sure of what to expect in the market.
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