Pro Research of the Week: Are Cannabis Stocks Ready to Go Higher Again?

investing.com:

While the initial decline appeared to be a correction after a rapid and strong surge, it simply did not come to a halt. Disappointment over the lack of progress in federal legalization in 2021, coupled with inflation, rising central bank rates, and oversupply leading to plummeting prices, have impacted the cannabis industry in 2022.

According to the Department of Justice, a pound of marijuana cost on average $6,000 in 2000. However, now, with the influx of new cultivators, supply has far exceeded demand, resulting in a market surplus and cultivators earning only $1,000 per pound for their products.

With lower prices and greater competition, it has become particularly tough for the sector's companies to produce healthy margins — particularly in the face of the current inflationary macro environment. The significant drop in cannabis stock prices, thus, can be attributed, in large part, to the inability to cover cultivation expenses.

The ETF AdvisorShares Pure Cannabis (NYSE:YOLO), for instance, plummeted over 92% from its peak of $31.87 in February 2021 to a low of $2.53 this week.

However, the bearish trend shows signs of slowing down, suggesting a potential bullish reversal. Financially, this could be justified by the currently extremely low valuations of cannabis stocks.

Moreover, despite structural issues, the cannabis market holds a promising future, with most studies projecting an annual market growth rate of over 10% in the next decade.

While federal legalization may be delayed, it is widely acknowledged as a significant campaign issue for the 2024 presidential election, fueling hope and potentially driving a new bull market for cannabis stocks.

Considering this context, it is worth examining cannabis stocks closely