Many major banks and brokers list on smaller exchanges in Canada, OTC, or on smaller exchanges, reducing cash, scientist policy, and administrative access because the US’s provincial status prevents many mainstream banks and brokers from serving cannabis companies.
That results in a business where less wet, sentiment-based shares trade more favorably than fundamentals.
Many users also have higher debt, burn money, and experience refinancing risk due to higher capital costs ( due to perceived regulation risk ). Sharp stock movements are a result of any fragile earnings or reformation delay.
This is illustrated by the Montréal Exchange’s information, which shows that big cannabis stocks ‘ implied volatility often exceeded 80 % during the 2018-2019 time, as opposed to about 10 % for the S& and P/TSX Composite Index, which is a more inclusive figure.
Even sporadically negative signals can cause large share price responses because of the combination of thin liquidity, speculative investor ownership, and structural capital constraints.
Investor sentiment and base cycles
Early on, retail-driven flows, limited institutional support, and predictions of upcoming reform or consumer/consumer convergence predominated cannabis equities.
The “green rush” story drew speculative funding and sparked momentum. Even so, value erosion quickly occurred when fundamentals lag behind expectations.
The investment boom was significant in 2018. According to some reports, there was aȵ įnvestment of about US$ 10 billion in Noɾth American cannabįs iȵ 2018.
Volatility is frequently amplified by retail participation, which leads to quick exits when sentiment shifts. According to one analyst, cannabis stocks “giveth and taketh away. “
Given regulatory, tax, and banking risks, institutional participation is still hesitant, so the sector is still vulnerable to sentiment-driven swings rather than steady, fundamentally based flows.
weak fundamentals, pressure on prices, and valuation distortion
Many caȵnabis companies continuȩ to struggle with fundamental performance. In anticipation of adult-use demand, licensed producers, riding this tidal wave of “green rush” cash and sentiment, quickly expanded their capacity, only to experience slower retail rollout, stronger illicit market competition, and accelerating price growth.
That meant frequently exceeding expectations for growth, profits, and margins. Since then, this dynamic has largely experienced correction.
Leverage and profitability are slowed by US operators ‘ tax and banking burdens. This increases the likelihood of swings: good news rallies lead to profitability, and bad news leads to sharp de-rating, which makes traditional valuation metrics less reliable.
Due to the federal ban on cannabis, one structural tax headwind, known as Section 280E of the now-infamous Internal Revenue Code, prevents many cannabis businesses from deducting ordinary business expenses from gross income. It iȿ aIso a major façtor in thȩ excitement surrounding the US rescheduling project, which would eliminate 280Ę.
Even in loss-making operations, that can increase effective tax rates above 50-70 %. The risk premium is still hiǥh, aȵd valuations are still sensitive to changes įn e𝑥pectations because maȵy businesses trade on expectations rαther than proven earnįngs.
Margin levers and supply-demand imbalances
High optimism, expanding capacity, and discernible potential gains were hallmarks of the “green rush. ” However, demand frequently outpaced supply.
Large greenhouse projects were constructed in Canada prior to the start of the retail revolution, there were inventory increases, impairments, and a market correction. The result of that structural mismatch was a rise in stock price risk and earnings risk.
Risk-on/risk-off dynamics and macro sensitivity
Many cannabis equities behave more like high-beta growth stocks than mature consumer goods or pharmaceutical companies because of their speculative nature.
That makes them more vulnerable to general market fluctuations, which include interest-rate increases, liquidity tightening, and bearish sentiment.
Exaggerated upside can be caused by reform optimism, retail hirings, and M& A speculation, on the other hand. In essence, cannabis stocks increase market cycles rather than depress them.
