Ed. Note: Cannabis stocks weren’t exempt from the brutal stock market, year-end collapse. Caveat emptor for cannabis stocks right now. Research thoroughly and invest carefully.
Despite no shortage of cannabis milestones, it was an odd year for pot stocks.
This has been a history-making year for the cannabis industry. Practically anywhere you look, marijuana firsts were occurring. In no particular order, here are some of the industry’s most notable events in 2018:
- Canada legalizing recreational marijuana following nine decades of adult-use prohibition.
- Vermont becoming the first state to approve recreational weed entirely through the legislative process in January.
- Two additional states (Utah and Missouri) approving medical pot during midterms, with voters in Michigan making it the 10th state to OK adult-use marijuana.
- Tilray becoming the first Canadian-based marijuana stock to go the initial public offering route on a major U.S. exchange.
- Nearly a half dozen previously over-the-counter-listed companies uplisting to the Nasdaq or New York Stock Exchange.
- The U.S. Food and Drug Administration giving the thumbs-up to its first-ever cannabis-derived medicine in June.
- Six of the largest deals and acquisitions in the history of the marijuana industry being completed or announced.
And there were many more events to list than this. It was truly a year of validation and legitimacy for the cannabis industry and marijuana stocks as a whole.
A year of validation, with little victory for investors
Yet what looks to have been a great year for the industry is shrouded by perhaps the craziest marijuana statistic of all for 2018. Despite this perfect storm of good news throughout the year, the Horizons Marijuana Life Sciences Index ETF (NASDAQOTH:HMLSF), the very first marijuana ETF, is down 35% year to date, through Dec. 6. With approximately four dozen pot stocks held by the Horizons Marijuana Life Sciences ETF (albeit at different weightings), it suggests that the average marijuana stock lost a double-digit percentage during the year.
What companies were the primary culprits, you ask? We can begin with Aphria (NYSE:APHA), an Ontario-based grower that’s been rocked by allegations of overpaying for Latin American and Caribbean assets in order to enrich company insiders. Once among the largest marijuana stocks by market cap, Aphria’s share price has been shelled, having lost two-thirds of its value since the year began following the report issued by short-side firm Quintessential Capital Management and forensics company Hindenburg Research. When combined with the fact that this is Aphria’s second questionable transaction of 2018, it’s not hard to understand why it’s been such a drag.
Aurora Cannabis (NYSE:ACB), which is also among the most heavily weighted marijuana stocks in the Horizons Marijuana Life Sciences ETF, is down 44% year to date. Even with Aurora aggressively acquiring companies, partnering with Alfred Pedersen & Son in Denmark to retrofit existing vegetable-growing facilities for cannabis production, and announcing a new organic build project in Medicine Hat, Alberta, investors clearly have concerns. In particular, Aurora Cannabis’ rapid growth has come at a cost to investors: excessive dilution, with its share count likely to surpass 1 billion in the coming quarter.
There are broader issues at work
Beyond just individual stock underperformance, there were broader issues at play that dragged down pot stocks amid what should have been a time for celebration.
To begin with, the legalization of marijuana in Canada officially put an end to the “promises stage” of the investment cycle and forced investors to come to terms with the fact that earnings reports actually matter now. The first round of operating results in a legalized environment simply wasn’t that pretty, with seven of the top producers combining to lose nearly $300 million.
The biggest loss of all came from Canopy Growth (NYSE:CGC), which on an operating basis — i.e., excluding fair-value adjustments and one-time gains and losses tied to acquisitions and derivatives — lost almost 215 million Canadian dollars. Growers like Canopy are going to be busy completing capacity-expansion projects for probably the next year or two, all while working on brand building, marketing, and international expansion. Essentially, it means Canopy Growth and its peers will be spending liberally and, as a result, may not be profitable anytime soon.
It also looks as if investors have come to terms with the fact that the industry is very crowded and not yet able to take advantage of many high-margin alternative products.
You see, only dried marijuana flower and cannabis oil are legal for sale in our neighbor to the north. Canada’s Parliament is expected to discuss and approve alternative consumption options (edibles, infused beverages, vapes, and concentrates) by this upcoming summer, but there’s no official timeline beyond these rumors. That leaves growers potentially exposed to what’s proven to be a highly commoditized product (i.e., dried cannabis flower), at least in U.S. markets where adult-use weed is legal. Effectively, operating margins for marijuana stocks may not be anywhere near as high as Wall Street and investors expect.
Image source: Getty Images.
Will 2019 be a better year for marijuana stocks?
The big question is: Will pot stocks have a better year in 2019 than they did this year? While I’d like to say yes, the bottom-line dilemma for marijuana is…well…their bottom line.
As we likely near the end of the second-longest economic expansion cycle in more than 160 years of U.S. history, investors’ attention is liable to turn away from growth stocks and toward value stocks. Even with the meaning of “value” potentially changing from one person to the next, the common factor investors will be looking for is recurring profitability. That’s simply something that marijuana stocks may not be able to deliver over the next year.
On one hand, expenditures are going to be through the roof as capacity expansion continues, product lines expand, and existing products are built up and marketed to the public. Rapid sales growth has, so far, been met by even faster cost growth, leading to losses. This may not change much in 2019.
The other concern is that red tape could hold marijuana stocks back next year. Health Canada, the regulatory agency responsible for approving or denying cultivation licenses and sales permits, has been absolutely bogged down with requests for most of the year. Its inability to quickly review and approve cultivation licenses and sales permits could really stymie production, thereby slowing sales growth and dooming pot stocks to ongoing losses.
Until we see recurring profitability, it could be difficult for investors to trust marijuana stocks.
Original Article – Motley Fools: The Craziest Marijuana Statistic of 2018
Images source: Getty Images.