The winds of change have blown through the world of cannabis stocks with the news that Standard & Poor’s has discontinued its Canadian and international cannabis stock indices, forever changing the landscape of the young industry. It comes as a shock to many as the indexes featured some of the leading cannabis stocks from around the world. Investors now find themselves in uncharted waters, struggling to understand the implications of this sudden move.
1. S&P Downgrades Cannabis Stock Indices
The Standard & Poors Dow Jones Indices (S&P) recently downgraded its Cannabis Stock Indices due to a lack of progress made in the industry in regards to regulation and legalization. Marijuana-related stocks were the first to feel the effects as they dropped drastically following the news.
Investors should be aware that the cannabis industry is still very much a volatile and uncertain landscape. Many of the stocks listed in the Cannabis Stock Index are still inputted as “blank certifications”, meaning their worth could rapidly change due to changing regulations, or any other number of unpredictable factors. Aditionally, the industry requires heavy funding and support in order to survive, yet up until now the growth of cannabis related stocks still remain under speculation.
- Pros: Market for cannabis stocks is still in its early stages, offering potential for rapid growth.
- Cons: Regulatory uncertainty and lack of liquidity make the market inherently risky.
2. Goodbye to the International and Canadian Cannabis Stock Indices
As of February 10, 2021, the International and Canadian Cannabis Stock Indices are officially ceasing operations as two of the earliest barometers of the marijuana market on the NASDAQ Global and Canadian exchanges. As one of the industry’s first efforts to organize data about the legal cannabis sector, the indices filled a critical void in both market transparency and investors’ access to objective market data.
On one hand, these indices provided investors with careful watch of North American cannabis companies and provided some of the earliest pathways to cannabis-based investments. On the other, the indices laid the groundwork for performers by allowing them to quickly identify high-flying stocks, overshadowing the industry’s more methodical long-term players. Now, as the sector matures and proof-of-concept scenarios are becoming mainstream, the final chapter of the International and Canadian Cannabis Stock Indices has been written.
- The indices opened up access for investors to the marijuana market
- They provided a way to identify high-flying stocks
- Maturation of the sector has outpaced the need for these indices
3. What Does the Index Termination Mean for the Cannabis Industry?
With the recent index termination of certain companies in the cannabis industry, one has to consider what this will mean for the future of said industry. Firstly, the immediate effects are likely to be significant. Companies that have been removed from the index are likely to take a financial hit, and investors may feel uncertain about investing in the industry overall.
- Shares may continue to drop, as people who wanted to take their investments out of the companies that have been removed will put added pressure on the market.
- The consumer may be affected as companies struggle to stay afloat in a down market.
It remains to be seen what the long-term effects will be, as people may be less eager to invest in the industry in the future, causing significant losses in the budget of affected companies. It is no secret that certain sides of the industry have struggled to comply with laws, regulations and taxation, leaving investors somewhat wary.
4. Is This the End of the Cannabis Stock Index Boom?
The cannabis stock index has enjoyed a meteoric rise over the past few months, with many stocks increasing threefold in just a few weeks. But investors are now wondering is this the end of the boom times for the cannabis sector?
The short answer to this is that it is too early to call. The cannabis sector has had to battle numerous roadblocks, from anti-cannabis legislation to supply chain issues. While progress is being made on all fronts, there is still a lot of uncertainty surrounding the industry’s longevity. While it is possible that the boom times may come to an end, there are a number of factors that suggest this may not be the case.
- The US is beginning to relax cannabis regulations, while Canada is expected to legalize marijuana for recreational use soon.
- There is increasing interest from venture capitalists, who are looking to cash in on the potential of the industry.
- Several major cannabis companies are actively investing in their research and development efforts.
It appears that cannabis stocks still have plenty of room to run, at least in the short-term. However, investors must be aware of the potential risks associated with investing in the sector. With this in mind, it is best to exercise caution before jumping on any bandwagon.
As more and more companies enter the cannabis sector, the S&P’s decision to discontinue its indices can be seen as a sign of the increasing investment safety in the industry. While S&P won’t provide coverage for these stocks, investors will still have the opportunity to navigate the market and take part in the nascent industry.