The Russia-Ukraine conflict has led to a highly volatile market environment which usually results in a sell-off of the most speculative assets. Is it time to go all-in on pot stocks, or are they still too risky?
Investors looking for the next big thing never lose sight of the burgeoning marijuana market. The sector is estimated to grow at a CAGR of 27% between 2021 and 2030, and the growth is largely driven by policy changes.
Recreational cannabis is already legal in 16 US states while it is available for medical use in 37 states. The idea of allowing its consumption in at least some form is gaining traction internationally as well. In 2018, Canada passed a comprehensive legalization law, and the new government in Germany has pledged to do the same before the next election term.
There are also examples of countries preferring a not-for-profit model. Thus, Luxemburg and Malta, two tiny European states, decided to allow adults to grow their own medicine from marijuana seeds. Italy might soon follow their suit if a popular referendum to legalize the cultivation of personal amounts of weed passes the legal hurdles and actually takes place.
These and similar developments set the stage for the industry’s above-average growth rates and make pot stocks seem like a promising investment. However, anyone looking at the performance of the major marijuana titles, as well as the ETFs tracking the sector, see a lot of ups and downs with so many more downs in the recent months.
On one hand, the industry goes in perfect lockstep with the broader market. After reaching its peak sometime in early November, it has been in a downtrend, with some analysts predicting a full-blown grizzly bear.
On the other hand, high volatility that always accompanies market downturns showed especially sickening swings for most marijuana stocks. And not every type of investor has the stomach for daily moves of such amplitude.
Thus, VTI, a broad-market index, only lost 1.15% on Tuesday amid the concerns of Russia’s ongoing aggression against Ukraine (with a threat of a full-scale military conflict), but major international marijuana companies showed greater losses.
Both the Canadian growing facilities (e.g. Canopy Growth) and their American opposite numbers (e.g Curaleaf Holdings) were down more than 7 percent, and even the less controversial CBD producers like Charlotte’s Web Holdings lost around 5 percent during the choppy Tuesday session.
Even the most ardent proponents of the ‘buy-the-dip’ philosophy get nervous in the current environment. The Russia-Ukraine war aside, there are fears of further rate hikes by the Fed which wants to protect the economy’s post-COVID recovery from the threat of rampant inflation.
It is only natural that in an environment like this more risky assets are hit the hardest, and pot stocks certainly belong to this class. While they may trade at a discount at the moment, further losses are possible, and the wait-and-see approach seems more reasonable now, if not for the market at large, then at least for the cannabis-related sector.
Disclaimer: This article contains its author’s personal opinions and shouldn’t be considered investment advice.