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What a sour year for investors who bet on the young cannabis industry!

From its March peak, the marijuana-focused ETFMG Alternative Harvest ETF (ticker: MJ) lost half its value, while the overall stock market rose. Few pot stocks now trade above the prices at which they came public on Canada’s stock market, where even U.S. operators had to go to raise equity capital. Canadian pioneers like Canopy Growth (CGC) and Aurora Cannabis (ACB) were laid low.

But 2020 will be better—at least for solid U.S. operators like Green Thumb Industries (GTII. Canada) and Curaleaf Holdings (CURA. Canada).

See our cover story on Canadian pot: “Marijuana Stocks Could Be a Buzzkill”

Barron’s warned investors that the pot-stock bubble was inflating too quickly, but the stocks soared early in the year as investors waited for Canadian leaders like Canopy, Aurora, Tilray (TLRY) and Aphria (APHA) to fly in response to the demand unleashed by their country’s legalization of recreational sales in October 2018.

American pot producers headed north. The U.S. stock market was closed to companies operating in pot-legal states because of the weed’s federal illegality, but a dozen U.S. operators got their stocks trading in Canada. They included Acreage Holdings (ACRG-U. Canada), Trulieve Cannabis (TRUL. Canada) and Harvest Health & Recreation (HARV. Canada).

See our U.S. pot cover story: “You’d Have to Be High to Buy American Marijuana Stocks”

The Canadian companies’ bubble stretched farthest. In the first months of 2019, the stocks of Canada’s large producers reached multiples of nine times the per-share sales that analysts were forecasting for the year, and more than 60 times the cash flows. As the year progressed, however, sales were disappointing and cash flows were increasingly negative.

Canopy and Aurora stocks tumbled, and the companies’ most visible executives lost their posts. In July, Canopy founder and CEO Bruce Linton was sacked at the behest of the company’s 38% shareholder Constellation Brands (STZ). In December, Aurora reassigned its chief corporate officer, Cam Battley.

Even in the enthusiasm of early 2019, U.S. operators’ stocks traded at a 50%-60% discount to their Canadian counterparts. That haircut was undeserved, as the Yanks showed they were better at selling weed.

A few spendthrift U.S. outfits like MedMen Enterprises (MMEN. Canada) floundered, but Curaleaf, Green Thumb, and Trulieve increased their sales and cash flows. Their stocks have fallen less than the Canadians’. Analyst Bobby Burleson at Canaccord Genuity says that the valuation discount of the U.S. operators has now narrowed to around 10%.

In 2020, Canada’s producers are looking forward to improved retail distribution, as populous provinces such as Ontario allow more stores to open. The growers are hoping for incremental sales from newly-allowed products like vapes, chocolates, and beverages. With an expensive bottling plant, Canopy has bet that cannabis drinks can take market share from beer and liquor.

Canaccord’s Burleson is excited over the prospects of U.S. operators, when recreational pot sales rev up in Michigan and Illinois. As an election year, 2020 could see marijuana ballot initiatives in at least 16 states, including New York, Florida, New Jersey, Pennsylvania, Ohio, and Virginia.

Cannabis tourism to states where pot is legal could pressure regional laggards, as holdout states worry about losing tax revenue. Burleson notes that Michigan stores are opening along that state’s borders with Ohio, Indiana, and Wisconsin.

Marijuana-friendly changes to federal law picked up a little steam in 2019, with the House of Representatives approving a bill that would let state-licensed cannabis businesses use the commercial banking system. But that measure, the SAFE Banking Act, will have a hard time getting past the Republican-controlled Senate. And in any event, the current version of the SAFE Act still wouldn’t allow cannabis stocks to trade in the U.S.

Hopes ran high in 2019 for sales of cannabidiol, or CBD—the nonintoxicating ingredient in cannabis that Congress legalized at the start of the year. As Barron’s surmised, enthusiasm for CBD got ahead of its commercial value.

Large retail chains have held back from stocking the stuff. The U.S. Food and Drug Administration said that it may not permit CBD as an additive to food and dietary supplements without proof that it is safe. Just last month, the FDA warned that CBD can cause liver damage and diarrhea. Most CBD stocks have sold off with their cannabis peers.

Vape sales will have room to grow in 2020, after dropping 25% following the rash of severe lung injuries suffered by users over the summer. Epidemiologists found compelling evidence that the injuries involved vape oils adulterated with vitamin E acetate—a trick practiced by illegal dealers. Licensed sellers could take share from the black market, as customers return.

Just as after the dot.com bust 20 years ago, a few well-run companies will thrive. In 2020, they may start to show themselves.

Write to Bill Alpert at william.alpert@barrons.com