These 2 Pot Stocks Face a Challenging Future, Even if Biden Wins – The Motley Fool

There’s a lot of excitement in the cannabis industry about what a possible election win by Joe Biden might mean for pot stocks. Under President Trump, there hasn’t been any significant movement on marijuana legalization. But if Biden wins the Oval, there is potential for — at least — the decriminalization of marijuana. His running mate, Kamala Harris, said that her ticket would decriminalize the Schedule 1 drug in a debate earlier this month, causing marijuana stocks to rally as much as 10% on the day.

However, if decriminalization happens, it won’t have the same effects as outright legalization. There would still be plenty of restrictions facing industry players in a decriminalization scenario. And until legalization happens, two of the largest Canadian pot stocks, Aurora Cannabis (NYSE:ACB) and Canopy Growth (NYSE:CGC), will struggle to grow with limited access to the U.S. market. At the end of the day, it probably won’t matter who wins the U.S. presidential election, and both will face tough roads ahead.

1. Aurora Cannabis

In December 2018, the U.S. Senate passed the Farm Bill, which made hemp-derived cannabidiol (CBD) products legal at the federal level. It presented a legal way for Canadian pot stocks to enter the U.S. cannabis market. In May, Aurora Cannabis announced that it closed on its $40 million acquisition of Reliva, which sells hemp-based CBD products in the U.S. While the acquisition is an opportunity for Aurora to tap into a new and exciting market, it’s not going to lead to explosive growth.

Research company Brightfield Group recently slashed its forecast for the entire U.S. CBD market, which includes more than just hemp-based products. Previously, the company was projecting the market to be worth $20 billion by 2023. But now, demand isn’t looking as strong, and Brightfield expects that number to be just $12.4 billion. For 2020, it’s estimating the market will reach $4.7 billion in sales.

CBD element overlay with glass oil jars and cannabis leaf

Image source: Getty Images.

Aurora faces a crowded field of competitors in the U.S. in the form of companies like Charlotte’s Web and Green Thumb Industries. Battling for market share in what’s not a large segment to begin with may not lead to the sales growth that Aurora (and its anxious investors) is clamoring for.

When Aurora released its fourth-quarter results on Sept. 24, its net sales for the period ended June 30 totaled 72.1 million Canadian dollars ($54.86 million), which was a 5% decline from the previous period. And for its next quarter, Aurora is projecting its cannabis net sales (which is separate from total net sales but makes up the vast majority of it) to come in no higher than CA$64 million — they were CA$67.5 million in Q4. For the full fiscal year, the company reported a net loss totaling CA$3.3 billion, mostly due to impairment losses.

2. Canopy Growth

Canopy Growth turned heads last year when it announced plans to acquire Acreage Holdings (OTC:ACRGF). After all, the company couldn’t technically do a deal with Acreage — not without running into trouble with the exchanges, as it would be investing in the U.S. cannabis industry, which is not compliant with U.S. federal law. The pot producer’s solution was to put a huge asterisk on the agreement to say that once it’s legal to do so, it will close the deal.

Although Canopy Growth and Acreage announced in October that the Canadian producer’s cannabis beverages will be hitting the U.S. market next summer, investors should be careful with interpreting what that really means. The press release stated that Acreage would be launching Canopy Growth’s “sessionable tetrahydrocannabinol (THC) beverage formulations,” not the company’s actual products — which can’t legally cross the border. The announcement is a clever way to stir up excitement, and while Acreage can certainly help gauge interest for Canopy Growth’s beverages, it’s not the same as the Ontario-based company actually selling its beverages directly to U.S. consumers.

Like Aurora, Canopy Growth has been struggling to grow its sales this year. On Aug. 10, it reported net revenue of CA$110.4 million for the period ended June 30, which was up just 2.3% from the previous quarter. The company also called the new year, fiscal 2021, a “transition year” as it looks to make changes in the business to achieve positive net income. Canopy Growth recorded a mammoth CA$1.4 billion loss in fiscal 2020 as impairments weighed down its financials. In the first quarter of 2021, its net loss totaled CA$128.3 million.

Cannabis investors should temper their expectations for these pot stocks

It’s possible that if Biden wins the election in November, pot stocks surge on the results. But investors should be careful to note that there are other, more pressing issues (like the floundering economy) that he’d need to address amid the coronavirus pandemic. It could still be years before the U.S. government makes a significant move on marijuana legalization. And without full, unrestricted access to the U.S. market, it’ll remain a challenge for Aurora and Canopy Growth to generate strong sales growth as they’ll have to continue battling for market share in Canada, where the legal pot market is two years old and full of companies jockeying for footing in the industry.

Although both stocks have been struggling lately, Aurora’s doing noticeably worse in 2020:

^SPX Chart

^SPX Chart

^SPX data by YCharts

Unfortunately, these trends may not improve over the long haul. While these pot stocks may get a boost in November if democrats gain control of The White House and Congress, investors shouldn’t expect the bullishness to last.

Source: https://www.fool.com/investing/2020/10/24/these-2-pot-stocks-face-a-challenging-future-even/

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