Medicinal cannabis stocks took a dive in the aftermath of the cannabis referendum. Here’s why it happened.

In the aftermath of the cannabis referendum on October 17, stocks for the two NZX-listed medicinal cannabis companies both sold down. While the referendum concerned the recreational, not medicinal use of cannabis, medicinal cannabis companies say there may have been some confusion about the actual impact of the referendum on the medicinal market.

In September, one of those listed companies, Cannasouth, reached its all-time high on the NZX, trading shares for $1.21 each. After the election on October 17, prices declined, reaching a low of $0.54 one month later, after the cannabis referendum results were announced.

Mark Lucas, CEO of Cannasouth, says while it’s not possible to explain exactly why stocks drop when they do – it can be for a range of reasons – there is an argument that the eventual “no” vote did affect the way some investors perceived the brand’s growth potential.

“Some people may have made the assumption that a medicinal cannabis company would be in a good position if there was an adult use market. That’s not something as a company that we have articulated.”

Lucas says despite Cannasouth’s medicinal focus, there was a lot of confusion around what a “yes” vote would mean for the medicinal cannabis sector, which may have caused further confusion when the “no” vote became clear.

“[There was] a lot of confusion, a lot of people not understanding that medicinal cannabis is already legal, that there is a framework here and some people who felt that a business like ours actually depended on a ‘yes’ vote.”

The medicinal cannabis scheme, which came into effect on April 1, 2020, was put in place to improve access to quality medicinal cannabis products as medicine. Under the scheme, cannabis is only available under a prescription from a doctor and licenses need to be obtained for companies wanting to produce medicinal cannabis product – the Ministry of Health states this scheme is entirely separate from October’s cannabis referendum.

The cannabis referendum however sought to legalise recreational cannabis and allow designated dispensaries from which anyone over the age of 20 could purchase up to 14g of cannabis product per day. So why did investors get so confused?

Kristen Lunman, general manager of investment platform Hatch says it’s not uncommon that investors react to events not directly related to their investments. “It can have nothing to do with how that company, business, sector or industry is going. Share markets can be driven on emotion.”

She says in an industry like New Zealand’s medicinal cannabis market, people will be investing because of growth potential, and the referendum result would have scared some into selling shares. 

“With legalisation of cannabis over the last few years all over the world, there’s the sense that ‘this is an emerging industry and I’m going to get behind it and invest in its potential’.”

Investing is an emotional game, Lunman says, which means people often follow the crowd when they see a share price plummeting, often out of panic. 

“If you don’t have a really solid plan and a really solid reasoning as to why you’re backing something and a plan for that particular share then you’re going to react on emotion, and I think that’s what we saw in this case.

“People open their share portfolios and they see it’s gone into red and they panic because they’ve got into it without really thoroughly saying ‘regardless of what happens today or next year, I believe cannabis is going to grow over the next five years so I’m not going to panic.”

Lucas says the fundamentals of Cannasouth haven’t changed, and he’s not worried about the drop. The investors who have done their research won’t have reacted emotionally to the referendum result, he says.

“Medicinal cannabis is a large sector and growing rapidly globally, so anyone who was investing in a way that they had a good look at what they were investing in would understand that the fundamentals hadn’t changed for us.”

Cannasouth is only concerned with reaching goals it has set for itself, Lucas says, and share prices should rise when people can see these goals being achieved. 

“The sand moves beneath your feet quite quickly in just about any sector, obviously this is a highly regulated sector and there’s a lot of interest around medicinal cannabis but fundamentally it’s the same as any other business and our focus is on trying to get the fundamentals right and building a sound business model.”