3 Reasons Why 2020 May Not Be a Better Year for Pot Stocks

Cannabis investors who are looking for the sector to rally in 2020 could be in for a big disappointment. In 2019, the Horizons Marijuana Life Sciences ETF fell by 39%, and there were cannabis stocks that did much, much worse. Although valuations may appear to be low, especially compared to where they were at a year ago, that doesn't mean that they're cheap or worth investing in today. There are three reasons why investors shouldn't expect a big recovery from pot stocks in 2020:

It may be hard to accept the notion that stocks that have plummeted more than 60% in value are still expensive, but investors shouldn't be quick to scoff at that. HEXO (NYSE: HEXO) is a prime example of a stock that's fallen heavily and that may still be too expensive. It was one of those underperforming pot stocks that fell a whopping 70% in 2019, far below the Life Sciences ETF and what its peers averaged. While the temptation may be to point to HEXO's low price-to-book multiple of 0.7 and say that it's a cheap buy, it's just not that simple. Writedowns aren't uncommon in the industry and the value of what's on the books for many of these cannabis companies can be questionable at best.

Last month, HEXO released its year-end results. Not only did the company have fair-value gains on inventory and biological assets, but it also incurred an impairment loss totaling 19 million Canadian dollars during the year. The amount of noise on the company's financials makes it difficult to assess what the true value of HEXO's assets are today, and so if the stock is trading below book value, that may not necessarily mean that it's undervalued. Aurora Cannabis, for instance, trades at just 0.6 times its book value and investors aren't rushing out to buy shares of the company, either.

Source Fool.com