Pot stocks were crushed during the 2019 marijuana downturn. The 2020 coronavirus pandemic has made a bad situation worse.
Many investors are hoping that the coronavirus crash will be a brief affair. Encouraging data points from China and South Korea prove that the pandemic can be contained, but countries like the U.S. and Canada could be weeks or months away from a slowdown.
Here’s the most important thing to keep in mind: the bear market won’t end once the coronavirus passes. Thousands of small businesses are already being pressured. Many will go out of business, never to return. Larger corporations are also feeling the crunch. Firms that appeared well capitalized are suddenly preparing for the worst.
Pot stocks are particularly vulnerable. Most are just starting to ramp sales. Many are years away from generating positive free cash flow.
In the 2008 financial crisis, it was wrong to think that the damage would be limited to a few thousand people defaulting on their mortgages. Due to our hyper-connected financial system, the systemic effects had a far-reaching impact. The coronavirus crisis will follow a similar path.
Pot stocks will change forever
For years, continued financing was a given for pot stocks. Even if it involved diluting shareholders or issuing expensive debt, new capital could be brought in, especially when prices were skyrocketing in 2018.
Access to capital can no longer be taken for granted. Investors and institutions are scrambling to raise cash as asset prices fall. Companies that have elevated debt levels or lacklustre credit ratings are in trouble. Firms that can’t quickly pivot to a cash flow neutral business model may not survive without massive government intervention.
Since the pandemic began, shares have shed 50% of their value. It’s doubtful that capital markets will come to the rescue. An outright bankruptcy is in the cards.
These companies will survive
Remember, it’s not about future growth at this point, it’s about surviving the current crisis. Whichever pot stocks survive have the opportunity to consolidate the market, acquiring insolvent competitors and taking their market share. Only a handful of companies are a shoe-in for survival.
This is an incredible opportunity to scoop up distressed pot stocks. Just make your picks carefully.
The post 2 Pot Stocks That Can Survive the Coronavirus Crash appeared first on The Motley Fool Canada.
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