Canadian pot stocks appear to be in for a particularly rough day today. As proof, shares of Aurora Cannabis (NYSE:ACB), Canopy Growth Corporation (NYSE:CGC), and Cronos Group(NASDAQ:CRON) all fell by at least 10% in pre-market trading this morning. What’s the driving force behind this latest widespread sell-off in the cannabis space?
Fortunately, Aurora, Canopy, and Cronos’ shares aren’t dropping in response to a company- or industry-specific event. No, these high-flying pots stocks appear to be falling victim to a host of macroeconomic and geopolitical concerns that are weighing on stocks in general today.
Chief among these various headwinds is that some top economists are sounding the alarm that the U.S. economy could start to cool off in a big way in 2019 — and perhaps even go into a full blown recession by 2020. This dire claim is based largely on the yield of the five-year Treasury note falling below that of the three-year note last Monday. This so-called “yield curve inversion” has been a fairly reliable indicator of incoming recessions and economic slowdowns ever since the end of the second world war.
What does this economic warning signal have to do with pot stocks? Canadian pot stocks have been exploding higher over this year thanks to Canadian’s decision to end prohibition on the drug for recreational purposes among adults earlier this year. Unfortunately, this landmark event may have inflated an industrywide bubble.
Aurora, Canopy, and Cronos, after all, have all seen their shares trade at enormous premiums this year — premiums that simply aren’t supported by their near-term fundamentals. As such, it’s not surprising that investors are backing away from companies with bloated valuations ahead of a possible downturn in the economy.
Aurora Cannabis Inc. shares were trading at $5.12 per share on Thursday afternoon, down $0.28 (-5.19%). Year-to-date, ACB has declined -32.90%, versus a 0.95% rise in the benchmark S&P 500 index during the same period.
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