Coronavirus Fears Spook Markets, Dow Drops 1,000 Points Leading Wall Street to its Worst Day in 2 Years
Cannabis Sector Gets Hammered, These Pot Stocks Could Be in For a Rough Year if the Situation Continues
Global financial markets were in a state of disarray today as growing fears over the rapid spread of the new Coronavirus caused Wall Street to suffer its worst trading session in two years. The Dow Jones Industrial Average (^DJI) sold off sharply today dropping 1,031.61 points (-3.56%) and the S&P 500 (^GSPC) didn’t fare much better as it shed 111.86 points (-3.35%). The technology-heavy NASDAQ Composite (^IXIC) had the worse day of the three major U.S. indices losing 355.31 points (-3.71%). Canada’s main index, the S&P/TSX Composite Index (^GSPTSE) held up a bit better, by comparison, declining only 280.79 points (-1.57%).
Cannabis stocks, which were already on somewhat shaky legs before today, got hammered hard with nearly every stock in the sector closing the day deep in the red. Today’s bloodbath on Weed Street left many cannabis investors questioning why pot stocks were being hit so hard and what the Coronavirus had to do with the cannabis sector. Before we dig deeper into the connection between cannabis stocks and the novel Coronavirus, let’s take a moment to go over some important details about this deadly virus and why it’s having such a profound impact on financial markets.
What is a Coronavirus?
According to the U.S. Centers for Disease Control and Prevention, “Coronaviruses are a large group of viruses that are common among animals. In rare cases, they are what scientists call zoonotic, meaning they can be transmitted from animals to humans.”
The new Coronavirus (COVID-19) outbreak making global headlines originated in the city of Wuhan, China and is said to be a cousin of the SARS virus. The Chinese Communist Party has been very shady when it comes to releasing details on the current situation but they were quick to place the blame for the outbreak on a local wet market in Wuhan. There was even a video circulating showing a woman eating bat’s head which some claimed was propaganda of the CCP to help deflect from the true origin of the virus.
Over the past few days, new reports have surfaced questioning the legitimacy of the CCP’s claims and drawing attention to the fact that just a few blocks away from the wet market is the Wuhan Institute of Virology and China’s only Level 4 microbiology lab which was supposedly researching deadly coronaviruses.
Is it a coincidence that the epicentre of the Coronavirus epidemic just happened to originate just down the street from the only bioresearch lab in the entire country of China? Combine that with the fact that the CCP has denied President Trump and the CDC’s multiple offers to help get the situation under control and it’s not hard to visualize what actually happened. The new Coronavirus is most likely a man-made virus that accidentally escaped from the lab in Wuhan, China. The fact that it may have been genetically altered could be a reason for the rapidly rising death toll.
According to the official figures released today, there has been a total of 77,150 confirmed cases of COVID-19 and as a result 2,592 deaths. Experts on the subject warn those numbers could be much higher so it’s difficult to say if the situation is levelling off or getting worse.
Pot Stocks Pandemic
The supply chain of many North American companies is heavily reliant on China to manufacture products or certain parts that make up a final product. For example, China plays a critical role in Apple’s (NASDAQ: AAPL) iPhone supply chain with multiple different Chinese companies responsible for manufacturing various products and parts such as the assembly of Apple Watches and AirPods.
As part of the measures taken to help stop the spread of this deadly virus, Chinese cities have been put under lockdown and many businesses have been forced to shut down temporarily. As a result, Apple has already warned investors that the company will not meet its Q2 guidance due to the drop in production caused by the Coronavirus outbreak.
Cannabis companies that rely on Chinese manufacturing could face the same problem as Apple as many vape companies source their hardware or complete vaporizer devices from China. KushCo Holdings (OTC: KSHB) is an ancillary cannabis company that generates a lot of its revenue from the sale of vaporizers which it relies on Chinese companies to supply. KushCo also sells cannabis packaging materials, some of which it sources from China. Depending on how bad the Coronavirus situation gets and where KushCo’s suppliers are located in China, the company could soon be facing some serious supply issues.
Another company in the ancillary space that could be impacted significantly by the outbreak is a company by the name of Cree (NASDAQ: CREE). Cree is a market-leading innovator of lighting-class LEDs, lighting products and semiconductor products. The company provides lighting-solutions to the cannabis industry thought the sale of high-performance LEDs grow lights. Demand for LED bulbs has increased recently as cannabis growers continue to switch from HPS bulbs in favoured of LEDs which have been proven to produce less heat, use less electricity and last much longer. Cree may soon face issues due to the company being heavily reliant on its Chinese manufacturing facility which produces the LED light bulbs. Like KushCo, there is a real possibility that Cree could also face a similar supply issue if the Coronavirus outbreak continues to get worse.
In a worst-case scenario, investors could see the Coronavirus issue potentially work its way up the cannabis supply chain and begin affecting vertically integrated companies that sell cannabis derivative products in the form of vaporizers and disposable vape pens. Companies such as Organigram Holdings (TSX: OGI) (NASDAQ: OGI) (FRA: 0OG), Canopy Growth (TSX: WEED) (NYSE: CGC) (FRA: 11L1), Aurora Cannabis (TSX: ACB) (NYSE: ACB) (FRA: 21P) Aphria (TSX: APHA) (NYSE: APHA) (FRA: 10E) and Cronos Group (TSX: CRON) (NASDAQ: CRON) (FRA: 7CI) have all invested heavily in Canada’s new Cannabis 2.0 market recently announcing the release of new vaping products.
In September of 2019, Cronos inked a deal with MediPharm Labs (TSX: LABS) (OTCQX: MEDIF) (FRA: MLZ) for the filling and packaging of vaporizer devices for Cronos’ new adult-use cannabis brand, COVE. Before the Cronos news, Aphria signed a deal with PAX Labs to combine its extract pods with the PAX Era device and platform.
In December of 2019, Canopy provided a final update on the 2020 release of its new Cannabis 2.0 portfolio with included its Tweed branded vape products, Bluetooth-enabled Juju Joints and Twd./Van Der Pop branded 510 thread format devices. Aurora’s initial Cannabis 2.0 product shipment to retail outlets in Canada included a variety of 510 vape products. Last week, Organigram updated investors on its Cannabis 2.0 rollout of its Edison Vape Pens Powered by Feather.
These are just the bigger name players, many other cannabis companies in Canada and the U.S. have made similar investments in the vaping space. Hopefully, the Chinese government with the help of countries from around the world can get this deadly virus under control before it wreaks havoc on the global financial markets. Should China’s manufacturing sector get cut off from the rest of the world the impact could be catastrophic. Investors should continue to monitor the situation and do the proper due diligence to see how it affects the stocks in their portfolio.
For more information on the Coronavirus epidemic, check out the War Room: Pandemic Podcast below:
Video Source: YouTube
Disclosure: The Cannabis Investor does not hold a position in any of the stocks mentioned in this article.