Investors are positioning their portfolios for the last quarter of 2020, a difficult year for most marijuana stocks. Many lost a significant portion of their value. While shareholders wonder what may be next, we will discuss marijuana stocks that may not be around in the coming years.
In 2018, during the initial days of cannabis legalization in Canada, there was euphoria surrounding most pot stocks. In a recent study published in the University of Miami International and Comparative Law Review, Stephanie Ben-Ishai cites, “When cannabis was first legalized, the market capitalization of the industry as a whole in Canada exceeded that of publicly traded grocery stores, implying that consumers would spend more on cannabis than on groceries.”
That would have been an unrealistic expectation. Understandably, over the past two years, those valuations have certainly come down. Cannabis is an agricultural produce, bound by laws of supply and demand. Despite legalization, the black market in Canada, where the price of the produce is cheaper, is still going strong. High hopes around “Legalization 2.0,” which means edibles and pot vapes, did not generate much revenue for most companies, either.
Moreover, Canadian medicinal use and exports have not necessarily increased enough to make a positive impact for producers. The industry has too many players for each to benefit. Put another way, 2021 may become the year of consolidation.
Most analysts agree that unless there is a legal change at the U.S. federal level, cannabis stocks’ revenue is unlikely to improve. Unless there is increased revenue, a number of companies will find it close to impossible to survive.
Here are three marijuana stocks that are likely to have a difficult time in coming quarters:
Marijuana Stocks: Aurora Cannabis (ACB)
Our first discussion centers around Edmonton, Canada-based Aurora Cannabis, which gets significant investor interest. It was originally one of the darlings of the cannabis space.
Marijuana heavyweight ACB started trading first on the Toronto Venture Exchange (TSXV) in 2016. A year later it moved to the Toronto Stock Exchange (TSX). Late 2018 saw Aurora Cannabis list its shares on the NYSE. In a matter of days, ACB stock hit an all-time high of almost $120. But since then optimism has faded as the stock changes hand around $4. It is down close to 85% this year.
In recent months, the company has been selling shares and issuing debt securities, leading to a dilution in shareholder wealth. Quarter after quarter, it has been announcing less-than-impressive financial results and providing tepid guidance at best. Continued losses simply mean it is burning investor wealth with no end in sight to financial woes.
As of this writing, short interest in ACB is high and stands at around 20%. Contrarian investors may expect this metric to lead to a short-covering. However, any such jump in price is likely to be short-lived. Under the current circumstances, it would not be realistic to expect much from ACB stock.
Hexo (HEXO)
Ottawa, Canada-based Hexo first started trading, under its previous name Hydropothecary, also on TSXV in 2016 and then on TSX in 2017. In January 2019, it listed on the NYSE. The company was of one the high flyers in the first part of 2019. It was in the news when Hexo bought Newstrike in an all-stock deal valued at over $250 million. In April 2019, HEXO shares were flirting with $8.5. Those days are in rearview now as the price is around 70 cents.
In order to stay afloat, the group has had to resort to frequent equity issuance. The Newstrike purchase turned out to be a complete headache and financial loss as it became clear Newstrike had been operating without full legality. Hopes of expanding cultivation capacity also died. At this point, Hexo is still burning through cash and has no clear path to profitability.
Poor due diligence at the height of market optimism possibly led to the purchase of Newstrike. However, it also meant the beginning of the end for the share price. In 2020, HEXO stock has more than halved.
Hexo currently needs nothing short of a miracle at this point to make it a profitable company that would create shareholder value. We would not be buyers of the stock.
Medmen (MMNFF)
Culver City, California-based MedMen is a cannabis retailer with locations in six states. In October, the group released results for Q4 and fiscal year ended June 27, 2020. Revenue of $27.4 million was down 40% sequentially. Management blamed the pandemic for the decrease in sales. The company reported a loss of $23.3 million for Q4. A quarter ago, it had been $26.1 million.
Quarter after quarter, investors have been scratching their heads as they compare the revenue with the loss. Where does all the money go? To complicate things further, debt levels are concerning. As in the case of other cannabis companies, dilution of shares is the unpleasant reality for shareholders.
Spring for MedMen shares, which are down close to 80% this year, has ended. Sane investing discipline would require keeping away from MMNFF stock.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. She also publishes educational articles on long-term investing.
