I’ve earned a reputation for pushing pot stocks, and in the long run, I’m still very bullish. Primarily, I view this sector as being purely net accretive. Before marijuana enjoyed its current legal status, running a weed operation meant risking years behind bars. But for federal and state governments, this dynamic translated to opportunity costs.
Today, we have a viable roadmap toward full legality, and that will inevitably equate to tax revenues. That prospect initially boosted cannabis stocks to insane valuations. But recently, bearish traders have tested the strength of this thesis. While legal marijuana represents exciting growth potential, investors are now asking for supporting evidence instead of merely a good narrative.
Unfortunately, the narrative for pot stocks is shedding credibility against nearer-term fiscal concerns. For instance, one of the biggest criticisms leveled against cannabis firms is production capacity. Sector players have tossed around satisfying numbers, but can they back them up? Admittedly, financial data and management disclosures don’t provide much confidence.
Furthermore, cannabis stocks will likely suffer from unfavorable supply-demand dynamics. While Canada made headlines last year as the first G7 nation to legalize recreational weed, it’s not generating attention for sustainability. The reason? Canadians love weed, but not enough of them exists to justify the explosion in entrepreneurial participation.
Until the U.S. decisively enters the fray — not just a token few states — pot stocks will have a supply glut. In the meantime, conservative investors should probably avoid overexposure to these four names:
Cronos Group (CRON)
Cronos Group (NASDAQ:CRON) was among the big pot stocks that enjoyed an even bigger reception in the markets last year. From the start of the second half of 2018, CRON stock gained over 49%. And this year is even more impressive, with shares up 78% since the January opener.
But currently, that’s not what investors are focusing on. Rather, CRON stock absorbed an uppercut to the chin midweek after posting disappointing results for its fourth-quarter earnings report. The company badly missed its earnings-per-share target of 2 cents, and instead lost 5 cents. And while Cronos rang up sales that were 250% above the year-ago quarter, this haul also missed consensus estimates.
From a practical point-of-view, Cronos — like other cannabis stocks — has a credibility problem. Eventually, I believe CRON will get its mojo back. But for now, I’ve got to respect the bearish pressure impacting shares.
Canopy Growth (CGC)
It’s no surprise that pot stocks have garnered a reputation for volatility. With the specter of federal crackdowns representing a massive overhang, legal marijuana isn’t yet decisively legal. But even with that context, Canopy Growth (NYSE:CGC) was all over the map last year.
Gyrating several times between hope and despair, CGC stock tested everyone’s patience, including hardened speculators. That said, holding onto shares has yielded positive results for the most part. However, this thesis is undergoing its first major test.
While CGC stock is up nearly 62% year-to-date, shareholders only enjoyed these gains in the first month. Between early February through mid-March, Canopy flat-lined. More recently, CGC is taking a turn for the worst, with Wednesday’s session registering a 4% loss.
As with other cannabis stocks, I’m optimistic that Canopy will find its way. Unfortunately, most investors aren’t feeling the love, and that’s a dangerous situation for an emotional investment like CGC.
Aurora Cannabis (ACB)
If you had invested in Aurora Cannabis (NYSE:ACB) in 2017 or earlier, you’re loving life. Perhaps if you happened to take a sizable risk in ACB stock, you’re contemplating early retirement.
But similar to some other major pot stocks, Aurora incurred choppy trading throughout 2018. From searing heights to devastating lows, stakeholders got all the volatility they ever asked for in a single year. But to me, this is one of the factors that gives ACB stock credibility. If it can survive the prior intense scrutiny, it should overcome this year’s poor earnings season.
Fundamentally, I’m encouraged with Aurora’s exposure to the cannabidiol, or CBD market. As our own Tom Taulli points out, CBD offers all the benefits of medical marijuana but without psychoactive or addictive side-effects. This is particularly relevant today because of the opioid crisis. CBD provides a roadmap to true, non-deleterious therapies.
Unfortunately, when one of the big names among cannabis stocks goes down, it creates a ripple effect. Although I like ACB stock, the nearer-term downside risk is very real.
If the markets judged pot stocks purely on scientific merit, Tilray (NASDAQ:TLRY) would launch into low-earth orbit. And from late summer of last year, TLRY stock did exactly just that. From an initial public offering of $17, it hit an all-time high of $300.
Although the valuation was just nuts even back then, the bulls had justifiable reasons for their optimism. For one thing, the U.S. government granted the Canadian-headquartered Tilray permission to export cannabis for scientific and medical research. This landmark decision gave all cannabis stocks legitimacy merely from their association.
Ironically, that same factor is also hurting TLRY stock now. The earnings print for many weed companies hasn’t satisfied Wall Street. In turn, even solid names are taking it on the chin.
Of course, I’m not a big fan of this volatility, with my only comfort being the eventual discounted opportunity. At the same time, you’ve got to respect the tape. Stay away for now while the bad news fully bakes itself in.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.