Is the Marijuana Stock Bubble Ready to Burst?

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Marijuana is big business. In North America, legal sales of cannabis climbed 33% in 2017 to hit $9.7 billion, according to research from ArcView. The industry is projected to reach $25 billion by 2021.

With Canada set to officially legalize adult use of marijuana in October, lots of investors are looking at marijuana stocks with greater scrutiny. After all, a lot of the projected growth will likely come from Canada’s market. And marijuana-related sales may also include edibles, CBD oils and other cannabis-related products.

But have investors overshot marijuana stocks? Is the bubble about to burst?

North American Marijuana Index Falls

The North American Marijuana Index tracks share prices of top Canadian and U.S. marijuana stocks. Between mid-January and mid-July, the index has fallen 46%. Its value has quadrupled since February 2016, but it looks like the market reached its peak and is in the process of bursting.

Marijuana is a tricky market because there’s no precedent. Canada is the first industrialized nation to legalize pot. There’s little to go off of in terms of supply and demand outlook.

Demand may outpace supply initially, but as time goes on and as Canada’s growers reach full capacity, there may very well be a supply glut.

Oversupply became a problem in Washington, Colorado and Oregon within just a few quarters, so a supply glut is a valid concern.

Largest Pot Stocks Underperform in July

July was a disappointing month for marijuana stocks. Out of the top 25 largest stocks, 24 dipped lower. Among those, 10 ended the month lower by a double-digit percentage.

Zynerba Pharmaceuticals (ZYNE) took the biggest dive, falling 31.7% in July. The cannabis-based drug developer lost nearly a third of its value last month. The dip came after the company announced that it was offering about 4 million shares of common stock at $8 per share.

Zynerba also had disappointing clinical results with its ZYN001 cannabinoid-based patch. The company is now focusing on ZYN002, a cannabinoid gel that is being tested for use on patients with Fragile X syndrome and a few other ailments.

Shares of Auxly Cannabis Group (CBWTF) fell more than 26% last month. Auxly’s issue is its outstanding share count due to bought-deal offerings. The company has turned to common stock to raise capital, and its share count has soared as a result.

Auxly, which is a streaming company, provides capital to its licensed partners. Although the company’s market cap has markedly increased, share prices have fallen more than 70%.

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