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What to Expect in a 2020 Cannabis Bear Market

by Andrew Ward

New year, new cannabis market? 

That’s the goal after 2019 stock expectations failed to live up to lofty hopes. Instead of a booming, bullish market, 2019 saw cannabis stocks providing less of a return than 4-week Treasury bills

The once bullish approach to cannabis shifted to more bearish investing by many in the space. A myriad of issues received blame for the declining numbers. They include Canada’s ongoing supply issues, Ontario’s licensing delays, company operating losses, and several ventures continuing to dilute its shares by offering so many. 

Coupled with the ongoing struggles to attract customers from the more affordable illicit market, and it is safe to say 2019 won’t be regarded as a glowing year for the burgeoning space. 

Now, as 2020 takes shape, concerns remain in the cannabis space. What is there to expect in a market rife with uncertainty? Here’s what some predict could happen to the market in 2020:

Market Activity Should Continue, Some Agreements May Fall Apart

Market consolidation is a strategy employed by many companies when trying to survive in an emerging market. 

Cannabis is no exception, where a plethora of deals went down in recent years, including the nearly US$1 billion purchase of Cura Cannabis made by Curaleaf Holdings in May 2019.

It is expected that that thousands of companies across the US will continue to consolidate as more significant market players take shape by acquiring partners in the supply chain. 

However, not all plans may come to fruition as announced. Market downturns led to top industry names like Cresco Labs to pull out of a planned agreement to purchase the vertically integrated Florida brand VidaCann for $120 million. 

Industry analysts at the time believed Cresco’s decision highlighted how deals will likely close when focused on equity purchases. Experts also believe that company focus is expected to center on core markets and cash savings to get out of the red. As such, additional cancellations could be on the horizon before all is said and done.

Cannabis-infused drinks make up one of the fastest growing sectors in the industry.

Pictured: Cannabis-infused drinks are making a splash around the world. But, they may soon make the biggest splash in Canada. In October of 2019, Canada legalized the second wave of cannabis products, allowing the sale and regulation of cannabis-infused foods, drinks, topicals, and vapor pens. Editorial credit: paparazzza / Shutterstock.com

An Emphasized Focus on Profits via Opportunity and Operations

After nearly a year of underperforming, the cannabis industry unsurprisingly shifted its attention to making a profit. A focus on reaching profitability means tapping into blossoming markets. 

Such markets include extraction technology, which continues to blossom thanks to solvent and solventless extraction methods serving as viable generators of commercial-scale cannabis products. Extractors stand to benefit as their oils serve as the source material for scores of cannabis products, including:

    • Vape cartridges
    • Edibles
    • Tinctures
    • Topicals and more

Companies like Valens set an example by focusing on longer-term, multi-year deals. The more extended agreements allow the company to forecast its volume and revenue. In turn, allowing it to focus on growth efforts without depleting its funds. 

Then there is the classic emphasis on operations. Leading names like Cronos and OrganiGram received praise in recent months for their efforts to revaluing derivative liabilities and focusing on efficiency.

Location is part of the equation as well. Focusing on crucial regions appears to serve as the success model for brands like Trulieve, who has a keen focus on the Florida market. Currently, the company’s website lists 43 branded dispensaries across the state. In November, it reported a 22% revenue increase from the prior quarter. 

Lab assistant prepares cannabis distillate cartridges

Pictured: A lab assistant prepares vapor cartridges filled with cannabis distillate. Vapor cartridges, like edibles, are rapidly flooding consumer markets.

Additional Job Losses May Come

It may be harsh to call this latest downturn a bubble-bursting moment for the industry. That is, if you run a company. However, for scores of employees at top cannabis brands in 2019, their bubbles certainly deflated this past year as companies strived to turn a profit.

November represented a particularly harsh month for companies like Flow Kana, which laid off 20% of its staff. Around the same time, MedMen also laid off 20% of its corporate team as part of its restructuring effort. Other measures for MedMen included plans to sell its ownership in the Treehouse real estate investment trust. 

Job losses may come from the previously mentioned market activity as well. When companies merge, roles often become redundant, leaving room for only so many to stay on board. 

Today, most cannabis mergers focus on bringing together companies that fill in each other’s gaps, limiting fears of job redundancy. That, though, hasn’t been the case in the boardroom, where women and people of color tend to lose their place at the table with capital primarily coming from white males. This pinching out of all employees could continue as companies merge with more similar practicing entities. 

A Possible Quick Recovery in the New Year

Several cannabis companies, and even the industry overall, may see a sharp bounceback in 2020. Matthew Carr, the chief trends strategist for The Oxford Club, noted this fall that the industry has seen five other bear markets since 2017. 

Since March of that year, Carr reported, the North American Marijuana Index had risen 26.3%. The modest but not remarkable rise puts cannabis stock returns on the same level as the Dow Jones Industrial Average. 

Meanwhile, retail investors continue to champion cannabis despite the recent downward trending performances. An October 2019 report from ManifestSeven found that both U.S. (74%) and Canadian (79%) investors still consider the market appealing. 

As market uncertainty remains, 2020 should prove to be a formative year for cannabis. Here’s hoping it turns out better than 2019.

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