Investors came into the new week on a downbeat note, consolidating substantial gains from last week that sent the Dow Jones Industrial Average (DJINDICES:^DJI) and the S&P 500 (SNPINDEX:^GSPC) to new record heights. The Dow, S&P, and Nasdaq Composite (NASDAQINDEX:^IXIC) all gave up ground on Monday, albeit with only minimal declines.
One area that took a relatively large hit on Monday was the cannabis industry. Marijuana stocks were down sharply, giving up a small portion of the big gains that they’ve enjoyed so far in 2021. One earnings report from Aphria (NASDAQ:APHA) played a key role in triggering the downward move, but the question investors are asking is whether more declines are on the way as earnings season progresses.
Aphria has a tough quarter
Shares of Aphria were down 14% on Monday. The Canadian cannabis company reported fiscal third-quarter results that left investors concerned about the relative lack of growth over the past year.
Aphria’s revenue rose just 6% during the quarter, and gross profit was also up just mid-single-digit percentages even before taking into account fair value adjustments on inventory and biological assets. Meanwhile, a big boost in share-based compensation caused operating expenses to nearly double from year-ago levels.
It’s easy to forget as coronavirus vaccine rollouts continue, but much of Aphria’s market in Canada and Germany was subject to COVID-19 lockdown measures throughout quarter. The resulting supply glut also weighed on pricing, which hurt gross margin levels.
Collateral damage across the marijuana sector
The bad news from Aphria hurt the rest of the pot stock industry as well. Tilray (NASDAQ:TLRY), which is just about set to complete its merger with Aphria, saw its stock drop 13%. Other major players in the field also took hits, including Aurora Cannabis (NYSE:ACB) and its 9% decline, an 8% drop for Cronos Group (NASDAQ:CRON), and the 5% fall in shares of Canopy Growth (NASDAQ:CGC).
It’s unclear just how long the problems for pot stocks could continue. The rollout of vaccines in Canada has gone more slowly than in the U.S., and Canada has seen significant incidence of more easily transmissible strains of the coronavirus. If vaccinations take longer than hoped, then the spike in COVID-19 cases could put a strain on the cannabis industry throughout the middle of 2021.
Dodging the bullet
However, not all cannabis-related stocks were lower. In the U.S., marijuana real estate play Innovative Industrial Properties (NYSE:IIPR) posted a 1% gain, as it continued to offer a pick-and-shovel entry point for would-be cannabis investors. The company specializes in procuring properties for cannabis operators, sometimes engaging in sale-and-leaseback transactions with cultivators to free up capital for them and generate rental income for itself.
For now, U.S. investors don’t seem concerned about potential negative impacts on cannabis from the pandemic. Indeed, with more favorable attitudes toward pot in Washington, U.S.-focused cannabis stocks could well keep seeing gains even if major Canadian producers stay under pressure.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.