4 Ways Coronavirus Could Impact Cannabis Stocks

Over the past months, the coronavirus pandemic has taken a toll on many different industries. Still, some companies will ride out everything unhurt. Some will even emerge stronger by the end of the COVID-19 crisis, and cannabis seems to be among those industries.

Related: What to Consider Before You Invest in Cannabis Stocks

New Frontier Data estimates that the European cannabis market currently serves around 46 million consumers (5.9 percent of the population). Between both regulated and unregulated markets, European consumers will spend €62.7 billion on cannabis this year. Not only does the demand for cannabis in Europe remain strong, but it continues to evolve.

As for the U.S., sales of cannabis have been increasing amid the coronavirus pandemic — despite many sectors seeing significant decreases in commensurate revenue and sales.

Related: Legal Cannabis Sales Surging During Coronavirus Pandemic

There are still a lot of uncertainties regarding the ways this new normal will impact cannabis stocks. However, we can roughly predict the short-term and long-term future of the cannabis industry.

 

The impact of recreational legalisation efforts on cannabis stocks

There’s certainly a lot of talk about recreational cannabis legalisation, even though it may take some time to develop.

As a result of the outbreak and the lockdowns, many countries are facing substantial tax shortfalls. Due to the new circumstances, the legalisation of recreational cannabis for the potential tax revenue is becoming increasingly attractive.

As mentioned, legal cannabis sales have skyrocketed during the novel coronavirus crisis. Even though not all sellers have seen an increase in revenue, no state should overlook the potential tax revenue legalised cannabis can bring in.

The U.S.

As tax revenues from sectors such as hospitality and retail have fallen to all-time lows, states that have been considering legalising the recreational use of marijuana are more likely to make it happen.

To discuss multiple bills on cannabis laws, the House Energy and Commerce Committee’s Subcommittee on Health of the U.S. held a legislative hearing back in January. Unfortunately, the pandemic has paused further discussion on the matter.

Related: Coronavirus Pandemic Could Delay Cannabis Legalisation in Europe and the US

It’s safe to say that legislators don’t have the time to make any changes to cannabis legislation and regulation at the moment. We can’t expect the general election to pass significant cannabis laws this year. However, many predict that we can expect more legislative action in 2021.

Europe

The ongoing crisis is hampering cannabis legalisation across Europe as well. In its report on COVID-19 and drugs, The EMCDDA (European Monitoring Centre for Drugs and Drug Addiction) stated that delay in legalisation efforts is driving some consumers towards the unregulated market. It also highlights the importance of identifying ongoing changes that warrant an immediate policy.

In Catalonia, concretely, an estimated 300,000 cannabis club members resorted to illicit market sources due to the lockdown, according to the Catalan Federation of Cannabis Associations. Due to such reasons, many European cannabis policy groups, investors, and consumers are pushing for cannabis legalisation more than ever.

But, we are yet to see when exactly legislators across the EU will proceed with legalisation efforts.

Related: The Impact of the Coronavirus on the CBD Industry

North Macedonia is perhaps the best example of how the coronavirus is affecting the legal cannabis market in Europe. In this small Balkan country, Pharmacon is building a 16,500-square metre cannabis grow house.

According to projections, the facility will harvest 17 tons of cannabis a year. Pharmacon already has contracts with buyers from the UK, Poland and Germany.

However, social distancing workplace regulations have significantly slowed down the construction of the facility. Moreover, the local cannabis regulations have been impeding the company’s endeavour for years now. This time, the country’s lawmakers had to postpone the vote on the modification of cannabis policies due to the coronavirus crisis.

 

New mergers and acquisitions activity

The cannabis market saw a great number of mergers and acquisitions transactions (M&A) flounder or flop during the peak of the outbreak, even though the pandemic has had a positive impact on the industry.

However, in light of increasing valuations, there are many experts who believe M&A activity in the sector will increase as restrictions loosen and the economy begins to recover.

Related: How to Identify the ‘Third Wave’ of Cannabis Investments

The last quarter of the last year and the first quarter of this year were unkind to many North American cannabis businesses even with the pandemic-led increases in sales.

Some of these were struggling prior to the outbreak of COVID-19. Others were unable to obtain necessary financing. Some have even been seeking controversial bankruptcy relief.

Since cannabis is still a schedule I controlled substance, American cannabis businesses traditionally haven’t had access to U.S. bankruptcy protection. Distressed companies that operate within the industry are turning to state-specific avenues of relief rather than pursuing traditional Chapter 11 bankruptcy. Naturally, these rules vary state from state.

 

‘Essential’ cannabis businesses — the safety net for cannabis stocks

Unlike in other industries, cannabis companies don’t enjoy the traditional financial safety net. For most cannabis investors, success is the only option. Luckily, most states and municipalities designated marijuana retailers and growers as essential businesses.

The only state that stopped recreational pot sales was Massachusetts. Local regulators have allowed cannabis retailers to continue operations in every other province and state where marijuana is legal.

In the Netherlands, the government had shut down the country’s iconic coffee-shops at the beginning of the pandemic. However, it soon backtracked on its decision and allowed cannabis selling coffee-shops to operate as essential businesses.

Cannabis sales soared at the beginnings of the pandemic, thanks to the widespread issuing of stay at home orders. People raced to stock up on their favourite strains and consumables.

Moreover, many consumers turned to marijuana, expecting that it can help them cope with the anxiety brought upon by the pandemic and the lockdown. This year’s retail sales of recreational and medical cannabis in the U.S. are on the pace to eclipse 2019 sales figures by 40 percent.

The ‘panic buying’ and other market events caused by COVID-19 have undoubtedly had an impact on market psychology and expectations. Because of this, cannabis stocks have seen significant gains.

However, as soon as consumers realised that there is no need to stock up on cannabis, the increase in sales tricked off in April. So, as sales continue to level off, we will see how sustainable these gains are.

We can expect cannabis stocks to continue growing, true. But, we can also assume that the fate of many cannabis businesses will depend on how much will people consider marijuana to be an essential expenditure.

 

FTC and FDA could undermine cannabis stocks

Even though the future looks bright for the market, it’s important to address the ever-present threats. Last year, the Federal Trade Commission (FTC) and the Food and Drug Administration (FDA) aggressively clamped down on marketing claims made by businesses that produce CBD products.

Related: FDA and WHO Statements on Safety of CBD — Featuring Dr. Scott Shannon

And now that claims of COVID-19 benefits are increasing, the FDA has taken another hardline stance against unsupported CBD marketing claims. The latest warning letters from the agency have been equally aggressive. These warnings undermine the case for cannabis legalisation and investments.

In the past, FDA warnings caused cannabis stocks to drop significantly. It could happen again this year if the number of hucksters and scammers in the industry continues to increase. Unfortunately, the COVID-19 outbreak continues to encourage many cannabis businesses to make fraudulent treatment and prevention claims.

 

Takeaway

The marijuana industry and cannabis stocks are very resilient. In the past few years, the market has followed geopolitics both positively and negatively. Many major cannabis stocks are looking to stay on point with the current trends.

Investors and companies alike are putting money into the sector because it has reacted positively to the coronavirus crisis. States are not shutting down legalisation efforts and research projects, they are just delaying them or pushing the deadline.

Related: 3 Tools Value Investors Use To Evaluate Cannabis Stocks

Cannabis stocks are delivering greater profits than ever, thanks to the rising demand for cannabis. There are many reasons to believe that cannabis is one of the most ‘future-proof’ markets.

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