Cannabis stocks were a sea of red Friday as the broader market tumbled, leading investors to take the opportunity to lock in recent gains.
The Dow Jones Industrial Average was down more than 400 points after weak data out of Germany and the U.S. that stoked global growth fears. The flight out of stocks led to a rally in bonds that caused the spread between the three-month Treasury bill and 10-year note to invert for the first time since 2007. A yield-curve inversion is generally viewed as a harbinger of an economic downturn.
“It looks like a pause after an massive run in valuations,” said Mark Noble, senior vice president for ETF strategy at Horizons ETFs Management, which manages the Horizons Marijuana Life Sciences ETF HMMJ, -3.42% . “Surprisingly strong sales numbers,” he said, were reported by “the big three”: Canopy, Aurora and Tilray. “This looks like some profit-taking after those numbers really drove increased enthusiasm into the market.”
Jason Wilson, a partner in the ETFMG Alternative Harvest ETF MJ, -4.19% , agreed that the market has run up strongly in 2019.
“As earnings continue to trickle out, people are waiting to see what the next movement is — there has been strong revenue growth,” he said. “There’s been a lot of back-and-forth questions about whether valuations are getting lofty again. Last week we had some good, positive movement. And when we get these upward spikes, we tend to see some pullback.”
In regulatory news, state lawmakers in Connecticut held two separate meetings on bills to legalize cannabis and expand that state’s medical program, as reported by Marijuana Moment, a website that works with activists, industry representatives and policy makers on trends affecting cannabis.
If passed, the bills would allow adults 21 and older to possess, buy and consume cannabis recreationally. One bill includes provisions to bring communities that have suffered disproportionately under the current regime into the legal industry.
MedMen Enterprises Inc. MMNFF, +4.41% bucked the downward trend to trade up 6%, after the company said it has entered an agreement with funds managed by cannabis investor and private-equity firm Gotham Green Partners for a senior secured convertible credit facility of up to $250 million.
MedMen Chief Executive Adam Bierman said the money will be used for general working capital, including making some of its retail licenses operational, with a focus on Florida, integrating other recent or pending transactions, including those related to PharmaCann LLC, expanding geographically through new acquisitions and for other purposes.
The notes will be issued in three tranches with the initial tranches expected to be in the amount of $100 million. In the first 12 months, interest may be paid in kind, meaning by issuing more debt.
Curaleaf Holdings Inc. CURLF, +7.18% was another bright spot, gaining another 32% in value a day after it said CVS CVS, -2.37% drugstores CVS, -2.37% are selling some of its CBD products in eight states. The stock was boosted by news that BlackRock Inc. BLK, -3.02% , the world’s biggest asset manager, has taken an $11 million stake in the Massachusetts-based medical cannabis company, according to Marijuana Business Daily.
The stake is small relative to BlackRock’s roughly $6 trillion in assets under management, but is a vote of confidence for the sector, which has attracted few big institutional investors while cannabis remains illegal at the federal level.
Cronos Group Inc. shares CRON, -6.38% CRON, -6.04% fell 4.8%, ahead of quarterly earnings scheduled for Tuesday. Analysts polled by FactSet are expecting the company to report a loss of C$0.02 ($0.01) a share and revenue of C$10.4 million ($7.8 million).
Jefferies analyst Owen Bennett said the report may not contain many surprises.
“While historically a solid operator, at present we feel there is little to get really excited about other than the investment and large sum of money from Altria MO, -0.37% ,” Bennett wrote in a note to clients in February, referring to the tobacco giant’s $1.8 billion investment in Cronos.
“We also question when Altria value creation will begin to [materialize], especially as there appears little near-term appetite to put the Altria money to work. Against this backdrop we think the market has gotten ahead of itself.”
Cronos shares have gained 87% in 2019 so far, despite the lack of news. The entire cannabis sector is looking stretched, given other notable gains, such as Green Organic Dutchman Holdings Inc.’s 100% year-to-date gain, the 101% gain enjoyed by CannTrust Holdings Inc. and Hexo Corp.’s 84% gain.
Elsewhere in the sector, Canopy Growth stock CGC, -3.61% WEED, -3.19% was down 2%, Aleafia Health Inc. ALEF, -0.44% ALEF, -0.44% was down 3.8% and CannTrust was down 2.2%.
OrganiGram Holdings Inc. OGRMF, -2.41% was down 1.5%. Tilray TLRY, -4.40% was down 3.1%. Hexo Corp. HEXO, -6.19% was down 3.8%. And Aphria Inc. APHA, -5.27% APHA, -4.41% was down 3.8%.
