It’s not exactly clear why investors are selling marijuana stocks. The weed market is still growing like lightning, and Ontario just legalized in-store cannabis sales. However, it’s possible that a delayed reaction to post-legalization earnings could be contributing to negative sentiment. Although investors were wowed by the three figure growth that marijuana producers posted for 2018, they may have taken a while to realize the structural problems the sector faces. One of those problems will be familiar to marijuana buyers in the U.S. State of Colorado–and while it is definitely good news for them, it could be bad news for investors.
Marijuana is essentially a commodity. Although weed smokers may have a preference for certain strains, there’s not a huge amount of brand loyalty in the market overall. This being the case, the marijuana industry will over time tend to become highly competitive. As more and more suppliers flood the market with weed, they’ll be downward pressure on prices and prices will fall. It looks like this is happening in Canada, just as it happened in Colorado.
A “perfectly competitive market” is far from a “perfect” thing for investors. In such markets, prices tend to fall, taking margins along with them. Of course, with dozens of international markets and U.S. states to break into, marijuana producers have plenty of room to grow their sales volume. That said, most of these companies are already losing money on operations–which isn’t a situation you want to be in while selling prices are tanking.
Andrew Button has no position in any of the stocks mentioned.” data-reactid=”39″>Fool contributor Andrew Button has no position in any of the stocks mentioned.
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