Cannabis stocks got hammered Thursday amid the coronavirus meltdown in the broader markets and a flurry of cannabis-related event cancellations nationwide. And although analysts warned investors should be wary of supply chain disruptions for cannabis vape and equipment manufacturers, some companies noted a surge in business due to cannabis stockpiling and increasingly common social distancing behaviors.
Advisor Shares Pure Cannabis ETF ($YOLO), which contains only pure play companies, closed down 13.3 percent in intraday trading. ETFMG’s cannabis exchange-traded fund Alternative Harvest ETF ($MJ), a more diversified basket of stocks that contains a mix of pure play cannabis companies, tobacco companies, and ancillary stocks like Scotts Miracle-Gro ($SMG), was last trading down about 10.7 percent.
Coronavirus-fueled selling comes on the back of an already challenging year for cannabis companies. The slower than expected rollout of adult-use cannabis in key markets like Canada and California exacerbated weak leadership and even weaker balance sheets among major cannabis companies. As they began to miss their targets, the investor base, made up predominantly of retail investors, panicked, kicking off a months-long market rout. Add to that the vape crisis that sickened more than 2,800 and killed 68, and new concerns over supply chain interference for cannabis vape, packaging, and equipment companies and you have what Mitch Thompson, director of product development for vape company Feather, called a “perfect storm” for the industry.
Eight Capital’s Graeme Kreindler released a note on Monday digging into disruption potential for various parts of the industry.
“During our conversations with investors, the general view is that supply-chain risk as a result of a viral outbreak is minimal. We beg to differ,” he wrote in the note.
At the highest risk for supply chain disruption are things like specialized cultivation equipment and vape hardware. Since practically all hardware is sourced from China, factory downtime and shipping restrictions could strain an industry that is expected to see increased demand for these sorts of products, given the rollout of Cannabis 2.0 in Canada. Counterintuitively, Kreindler points out, inventory build-up from the vape crisis may actually help some companies that are running low on supplies. More moderate disruptions are expected in areas like personal protective equipment — gloves, goggles, suits, etc. — that are required for employees working in cultivation and manufacturing but are under increased demand more generally from the viral outbreak.
Aside from supply chain disruptions, a number of cannabis-related events have been canceled as social distancing is encouraged and local governments try to clamp down on the spread of COVID-19. Austin’s technology, music, and, as of 2019, cannabis-focused festival South by Southwest, was canceled on March 6, prompting other organizers to follow suit. A number of cannabis events, including Hall of Flowers, High Times’ Cannabis Cup Central Valley, and the California Cannabis Industry Association’s Annual Policy Conference, also have been canceled or postponed, according to Leafly. Plus, with 420 around the corner, more cancellations are likely imminent.
“Numerous impacted communities are going to have to scrub their 420 events, based on the level of local community transmission. We are already seeing high community transmission out here on the West Coast,” David Downs, California Bureau Chief at Leafly told Cheddar. “These types of rules, where no gatherings over 1,000 people, which is what Santa Clara County said this week, promise to promulgate across the country.”
New York Gov. Andrew Cuomo on Thursday banned gatherings of 500 or more across the Empire State in an unprecedented move that also forces the closure of Broadway theaters.
Of course, some companies and services have actually seen a spike in business in the weeks since cases started popping up in the U.S. Cannabis e-commerce platform I Heart Jane noted a surge in sales in Washington, one of the states hit hardest by the coronavirus outbreak. Sales jumped 23 percent since Jan. 20, when the first COVID-19 patient was identified, and about 9 percent during the week of February 17 through February 24.
Sugarmade, which owns a 40 percent stake in Northern California delivery service BudCars, also noted increased demand for its BudCars delivery service. Sales surged 10 percent week-over-week for the past two weeks, with notable increases in the number as well as in the overall size of orders.
“It’s already very clear: people are showing an overwhelming preference toward delivery as nesting takes hold. That applies to cannabis as much as anything else. We are fully prepared for a continuous ramp in demand for our delivery services over the coming months and beyond,” Jimmy Chan, CEO of Sugarmade, said in a statement.
The CDC has also encouraged people to stockpile several weeks of any routine medications in case they end up quarantined.