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In the wake of a significant uptick in U.S. cannabis equities in September, October witnessed a stark reversal, plunging many cannabis companies back to their pre-HHS announcement valuations.
Scott Fortune, the lead analyst at Roth MKM attributes this volatility to a confluence of global and domestic challenges, including geopolitical instability, the near shutdown of the House and then the appointment of anti-cannabis Speaker Mike Johnson.
The October selloff saw multi-state operators (MSOs) endure an average share performance drop of 27%, with the top five MSOs plummeting by 30%. Compared to this, the S&P took only a 2% hit, while the Russell 2000 saw a 7% decline.
Fortune expressed surprise at these figures, highlighting the industry’s unpredictability and emphasizing the crucial need for federal reform.
Despite the potential catalysts looming at year-end, including DEA rescheduling to III and potential Ohio adult-use voting, the cannabis sector's progress hinges on actual policy reform. Fortune projects mid-2024 as the potential turning point, dependent on the opening of capital markets and institutional investment.
In the meantime, Tier-2 MSOs, driven by standout performances from TerrAscend Corp Stock (OTC:TRSSF), Glass House Brands Inc (OTCQX:GLASF), and Ayr Wellness Stock (OTC:AYRWF) emerged as the only positive sector with a 4% YTD increase.
In contrast, October presented a challenging landscape for cannabis liquidity and trading volume, with virtually every segment falling below the 12-month average dollar volume. Fortune observes a return to pre-HHS announcement trading levels, despite the persisting potential of the rescheduling catalyst and the passing of SAFER Banking Act.
Valuations took a hit in October, wiping out September's gains and dropping to near all-time lows. However, Fortune views this as creating a favorable risk-to-reward buying opportunity, especially considering the strong regulated consumer transactions/volumes and ~4% growth in key states during 3Q23.
In view of October's complexity and volatility, cannabis investors now look cautiously toward potential reforms and market stabilization anticipated in mid-2024.
