2018 is history. Today I’m checking in to do a review of the cannabis sector in 2018 and share my outlook for 2019.
After delivering big annual returns in 2016 and 2017 – 2018 turned out to be a tough year for cannabis stocks.
The North American cannabis index fell 34%, opening the year at 311 and closing at 209.
Expectations for cannabis stocks were high going into 2018. Including mine. I was expecting another good year.
California was going legal on January 1.
Canada was going legal on October 17.
These high expectations sent cannabis stocks ripping in the fourth quarter of 2017. That momentum carried over into January of 2018 – when cannabis stocks charged into a new all-time high.
Take a look below at the fourth quarter rally – and big surge into 2018.
That big surge going into 2018 turned out to be kind of a curse. It was simply too much too soon. After the big jump in December and January, the cannabis sector spent the next eight months trending lower – falling 35% from January to August.
Then August 15 happened – the day Constellation Brands (STZ) announced a $3.8 billion investment in Canopy Growth Corp (CGC).
That sent shares of Canopy and the entire cannabis sector soaring. The cannabis index jumped 50% in two weeks and came within a few points of the all-time high.
At the point, it looked cannabis stocks were on pace for another killer year. But the good vibes didn’t last. The cannabis sector fell sharply in October, November, and December, coughing up those late summer gains.
With All the Good News in 2018, Why Did Cannabis Stocks Fall?
I see two big reasons the cannabis sector fell in the fourth quarter and closed the year in the red.
1 – Weakness in the broad stock market: US stocks just had one of the worst quarters in a decade and the worst December since the great depression. When the broader stock market weakens, capital flows out of high-growth sectors such as cannabis and rotates into more conservative areas such as dividend stocks, cash and bonds.
2- Cannabis stocks were up huge in 2016 and 2017: cannabis stocks delivered enormous gains in both 2016 and 2017. You can see both years in the chart below.
After two years of big gains, the sector finally needed to take a breather.
Today – after a pretty big selloff, I believe the stage is now set for a rebound in 2019.
I Expect a Rebound in the Cannabis Sector in 2019
Looking ahead into 2019, I think this big selloff from the fourth quarter has set the stage for a rebound this year.
The cannabis sector has a history of rallying big after 50% selloffs. It happened in both 2016 and 2017. Right now, after the decline, cannabis stocks are trading at their lowest point in almost a year. I expect that to trigger a lot of capital inflows as investors take a fresh look at the sector.
Beyond the recent dip – there should be a ton of great news coming out of the cannabis sector in 2019 – I see some major catalysts.
#1 – I expect the US to introduce federal legislation to legalize medical cannabis.
#2 – We are in the early stages of the cannabis mega deal – with big pharma, tobacco, and alcohol investing billions in the cannabis industry. I expect to see a string of deals in 2019 and that should be great for the sector.
#3 – The legalization trend is booming all across the world.
#4 – Finally, the sentiment is very bearish in the cannabis sector right now. And as Warren Buffet says, be greedy when others are fearful and fearful when others are greedy. I’m not seeing a lot of greed in the cannabis sector these days. It was a very tough quarter and investors are nervous. That is frequently the place where a rebound and new rally starts.
Here’s My Plan for the Cannabis Sector in 2019
My plan is to stay aggressive in the cannabis sector. Even though it was a tough year and quarter the industry is still in its very early stages and I see plenty of growth and potential gains ahead.
In terms of strategy, I think US cannabis stocks are going to have an excellent year. That’s why I am adding more shares of US cannabis stocks to client portfolios.
I still like Canadian cannabis stocks and I think they will do well in 2019. But Canada is up a lot more than the US in the last two years and I see more value in US cannabis stocks.
The Big Picture
The fourth quarter and December have been tough for the US and global stock markets. Don’t lose the faith. Even though bear markets can be painful these sell offs are a natural part of market and economic cycles.
I’ll be back with another update in the next few days when I will be sharing my review of the S&P 500 in 2018 and my outlook for 2019.
- mike@vodickagroup.com
- mikevodicka@gmail.com
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