Market Insights

The S&P 500 is pushing to new highs, but cannabis stocks aren’t so lucky.

Well known names like Canopy Growth (CGC), Cronos (CRON) and Aurora Cannabis (ACB) are down at least 4 percent so far today. The industry-tracking Alternative Harvest ETF (MJ) is also on pace for its worst session in two months and hasn’t made a new high since September.

No single factor seems to explain the weakness. Instead a series of negatives seem to be piling up:

• On July 3, Bruce Linton was forced out of leadership at CGC because his firm wasn’t making money quickly enough. That focused attention on the industry’s lack of profitability.
• On July 10, the House Judiciary Subcommittee on Crime, Terrorism and Homeland Security considered marijuana legalization nationwide.
• On July 11, CNBC reported that illegal marijuana vendors still dominate California’s pot industry despite legalization. That raises questions about the role of regulated public companies.

Remember, these stocks trade at very high multiples — often 30-50 times revenue. And, they’re mostly unprofitable. Furthermore, their “added value,” or intellectual-property edge, has never been hugely clear. Instead they were mostly trading vehicles around the theme of Canadian legalization. But now that day has passed.

Furthermore, most pot stocks are grouped under health care, which is lagging the rest of the market by a widening margin. The S&P 500 Health Care SPDR Fund (XLV) is now up less than 7 percent this year. Every other major sector fund has gained at least double digits.

In conclusion, cannabis stocks are lagging in a bullish market as some apparent negatives pile up.