Today ETFMG Alternative Harvest ETF (NYSE:MJ) stock hit an all-time low, leaving many investors wondering if the cannabis sector will continue to bottom out.
MJ is the largest cannabis ETF worldwide (and the first U.S.-listed ETF to focus directly on the global cannabis industry), so its recent plunge could be indicative of the overall cannabis stock market.
The ETF’s stock was down 0.7% this morning, its 8th-straight decline and 2nd-straight record closing low. Throughout the past three months, MJ stock dropped 30% as shares of Aurora (TSX:ACB) slipped 37%, Canopy lost 40% and Tilray went down 43%. Comparatively, the S&P 500 gained 2.0% during the same period.
Today the ETFMG Alternative Harvest ETF will be distributing a $10.6 million quarterly dividend to shareholders, which equates to $0.28 per share. Based on this Q3 dividend declaration, an annualized yield of 4.66% is projected (or 3.91%, after factoring in the fund’s 0.75% expense ratio).
What this could mean for the cannabis sector at large
To better understand what’s happening with the MJ ETF, it makes sense to take a step back and look at the cannabis industry as a whole. Starting with comments from Canadian Imperial Bank of Commerce analyst John Zamparo, he thinks that sales projections for the cannabis industry are “incredibly aggressive.
Zamparo forecasts that cannabis sales will reach $2.2 billion in 2020, and $3.3 billion in 2021. By comparison, the average analyst takes a much more aggressive stance on the industry, estimating for $6.5 billion and $7.5 billion, respectively, according to BNN Bloomberg.
The CIBC analyst also believes that consensus earnings estimates for cannabis companies are overvalued. He predicts cannabis producers will generate $550 million in EBITDA in 2020, and $975 million in 2021. Most analysts expect much higher EBITDAs from these companies, to the average tune of $900 million and $1.6 billion, respectively.
It’s important to note that CIBC’s estimates do not include international revenues. But Zamparo says, “It’s a fair observation that consensus estimates include international revenues, whereas our estimates do not. But the point remains that for many stocks — mostly outside our coverage universe — expectations are incredibly aggressive.”
Zamparo added that struggles of smaller cannabis producers could negatively affect the cannabis space as a whole, in the event these weaker businesses fail and are forced to liquidate their cannabis assets at a whopping discount. The profitability of even the strongest cannabis companies could be impacted in such a scenario.
Profits could continue to go up in smoke (or vape rather)
Adding to industry woes is the recent blowback on the vape scene. Earlier this week the CDC announced that there are now 530 cases of lung injury associated with vaping, up 39% from the 380 cases reported last week.
The CDC hypothesizes that these illnesses could be caused by vaping THC, nicotine or a combination of the two. Several patients have been hospitalized, and seven have died.
Now there is chatter among the U.S. legislature about straight-up bans on e-cigs and vaping, which would not bode well for the cannabis industry.
The ETFMG Alternative Harvest ETF (MJ) was trading at $21.77 per share on Thursday morning, down $0.32 (-1.45%). Year-to-date, MJ has declined -33.07%, versus a 11.31% rise in the benchmark S&P 500 index during the same period.
MJ currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #55 of 95 ETFs in the Global Equities ETFs category.