Shares of Aurora Cannabis (NYSE: ACB) Cronos Group (NASDAQ: CRON) and Canopy Growth (NYSE : CGC) all fell more than 13% last month, according to data provided by S&P Global Market Intelligence, following a regulatory scandal that prompted investors.
Cannabis shares were affected by the news that Canadian manufacturer CannTrust Holdings (NYSE: CTST) was busted by regulators for illegal cultivation of cannabis in unlicensed room. Shortly afterwards, CannTrust fired the CEO. Worse still, the company discontinued the sale of cannabis products and is facing disciplinary action by Health Canada which may include loss of the production license.
The CannTrust debate highlighted some of the risks associated with investing in cannabis. Although Aurora, Cronos or Canopy Growth are unlikely to make the same mistakes as CannTrust, investors seem to be pricing in the potential for compliance errors in their cannabis stock valuations.
Despite the risk, the cannabis market is still fertile ground for growth investors. Analysts at Stifel project that the cannabis industry will generate $ 200 billion in annual revenue over the next decade, up from around $ 12 billion in 2018. The companies that can compete and win in this fast-growing industry could provide huge returns for investors over the years forwards .
In this regard, Aurora Cannabis, Cronos Group and Canopy Growth have all the benefits of the cannabis industry's explosive growth. Aurora is the leading producer with top production capacity, while Canopy Growth and Cronos are the most cash-rich producers. These are powerful competitive advantages, which should serve these companies – and their shareholders – well in the coming decade.