The cannabis sector has seen a bit of a Jekyll and Hyde situation this year. In the first half, from January 1 to June 30, the Horizons Marijuana Life Sciences Index ETF (HMMJ) and the ETFMG Alternative Harvest ETF (MJ) rose 27.3% and 27%, respectively. Both ETFs outperformed the S&P 500 Index, which returned 17.3% during the period. Investor optimism over the legalization of hemp at the US federal level in December 2018, more US states opening up to cannabis, and expectations of growth in Canadian cannabis sales could have led the cannabis sector to rise.

However, in the second half, HMMJ and MJ are down 50.7% and 46.8%, respectively, as of December 4. Mounting operating losses, thriving black market sales, vaping-related illnesses and deaths, and a slowdown in cannabis sales appear to have dragged the sector down. Overall, HMMJ and MJ have fallen 37.2% and 32.4%, respectively, YTD. The S&P 500 Index is up 24.2% YTD.

Big winners in the cannabis space

Amid the weakness in the marijuana sector this year, Innovative Industrial Properties (IIPR) and Curaleaf Holdings (CURLF) are up. IIPR has returned 68.1% YTD, while Curaleaf has risen 23.8%. Strong second-quarter and third-quarter performances led IIPR to rise. The acquisitions of Select and Grassroots Cannabis, management’s optimistic fiscal 2020 outlook, and lower-than-expected net losses in the third quarter drove Curaleaf’s stock price.

Performances of prominent cannabis players

The weakness in the marijuana sector hasn’t spare even the heavyweights. YTD, Aurora Cannabis (ACB), and HEXO (HEXO) have fallen 51.9%, and 40.1%, respectively. Weak sales in the last two quarters and investor fears of dilution due to the early conversion of debentures caused Aurora stock to fall. Management’s withdrawal of its fiscal 2020 guidance, the abrupt resignation of its CFO, and a weak fourth-quarter performance dragged HEXO’s stock price down.

During the same period, Canopy Growth (CGC) (WEED) lost 33.8% of its stock value. Its lower-than-expected performances in the first and second quarters of fiscal 2020 caused its stock to fall. However, Bank of America’s upgrade and management’s update on its Cannabis 2.0 products offset some of the decline. In its last two quarters, Aphria (APHA) outperformed analysts’ expectations. However, the weakness in the marijuana sector caused its stock to fall 21.3% YTD.

The underperformers

MedMen Enterprises (MMNFF) (MMEN) and CannTrust Holdings (CTST) are the two biggest underperformers in the marijuana space this year. As of December 4, MedMen has lost 85.5% of its stock value. Accusations of financial irregularities, the termination of its merger agreement with PharmaCann, and its weak performances in the last two quarters have led the company’s stock to fall. Since July this year, CannTrust has been facing a series of compilation issues. These issues had prompted Health Canada to suspended its cultivation license. All these issues have caused CannTrust stock to fall 84.5% YTD.

Our take on the cannabis sector

With near-term challenges such as pricing pressure and excess supply, we expect the cannabis sector to remain under pressure in the short term. However, the introduction of Cannabis 2.0 products could act as a catalyst for growth in the space. Many cannabis companies have already submitted their products to Health Canada and are awaiting approval.

One of the main reasons for excess supply has been a slow rate of new store openings in Canada. However, Ontario and Quebec have announced that they’ll increase their store counts significantly in the next few months. We expect the launch of Cannabis 2.0 products and easy access to cannabis with the opening of new stores to drive legal cannabis sales. The legalization of marijuana at the federal level in the US could also play an important role in the growth of the cannabis sector.