Long-term investors that purchased any of the biggest cannabis stocks at the beginning of 2016 and had the stomach to hang on through their wild ride are up by well over 1,000% today.
But the ride hasn’t been much fun since April. After more than a dozen cannabis stocks logged gains of at least 70% in the first quarter, most marijuana stocks have been stuck in a four-plus-month funk. A combination of Canadian supply issues, high tax rates in select U.S. states, and persistent operating losses for most pot stocks has led to deflating marijuana stock valuations.
In some instances, this pullback could represent an intriguing buying opportunity. But for some of the biggest or most popular names in the industry, this dip still isn’t an attractive entry point. Here are three cannabis stocks that are at or near their 2019 lows that should still be avoided.
On Monday, Aug. 19, Cronos Group (NASDAQ: CRON) closed below $12 a share for the first time since early January. Although it does have nearly $1.8 billion in cash and cash equivalents to provide some form of downside protection (Cronos Group currently has a $4 billion market cap), it’s difficult to arrive at a $2.2 billion market value for the remainder of the company’s operations.
On one hand, I don’t fault Cronos Group for focusing its attention on the cannabinoid and derivatives market. Whereas most Canadian growers are aiming to produce as much cannabis as possible, Cronos Group may not even wind up as a top-10 flower producer when all growers are operating at full capacity, inclusive of joint ventures and royalty companies. But that shouldn’t be an issue if its high-margin derivatives, which’ll focus on vapes, take off.
On the other hand, Cronos Group is probably going to face the same supply issues that have plagued the Canadian dried-flower landscape since mid-October. Even with Health Canada implementing changes to the licensing application process and compliant packaging shortages beginning to work themselves out, it’s going to take multiple quarters, if not more than a year, before Canada’s supply issues are worked out. That’ll adversely affect the launch of derivative products.
Cronos Group has also been a disaster come earnings time if you exclude all of the one-time benefits and derivative liability revaluations. This suggests that Cronos Group’s cash pile will continue to dwindle as it makes acquisitions and executes on its long-term strategy, which is currently losing money on an operating basis.
In other words, Cronos Group still has downside to come.
Even as a shareholder of embattled pot stock CannTrust Holdings (NYSE: CTST), I don’t think this is the time to buy more. Shares of CannTrust closed on Monday at just over $2 a share, mere pennies from its 2019 low.
Mind you, there are very good reasons CannTrust is trading near its 2019 low. This is a company that purposefully deceived regulators by growing cannabis for six months in five unlicensed rooms at its flagship Niagara facility, had Health Canada find regulatory deficiencies at its smaller Vaughan facility, and has had 12,700 kilos of inventory placed on hold (some of it voluntarily). Additionally, CannTrust’s sales are suspended while Health Canada continues its investigation. In essence, the company’s future is completely up in the air.
It’s possible that CannTrust’s punishment could be on the lighter side, with the company retaining its growing licenses and, at worst, losing its held inventory and having to potentially contend with a few quarters of poor operating results. Then again, CannTrust may also see its growing license suspended for a period of time or revoked completely. Should that happen, CannTrust would probably have no choice but to sell itself on the cheap.
Ultimately, CannTrust does have potential, with up to 300,000 kilos of peak annual output. Somewhere between 50% and 67% of this output is slated to come from outdoor-grown weed, most of which will be used to create derivative products, such as edibles, topicals, and infused beverages. But as of right now, the stock isn’t buyable until Health Canada makes its ruling.
Lastly, investors should continue to avoid the largest marijuana stock in the world, Canopy Growth (NYSE: CGC), despite the fact that it hit its 2019 low on Monday.
Like Cronos Group, Canopy Growth has plenty of downside protection thanks to a large sum of cash. Canopy ended the most recent quarter with 3.14 billion Canadian dollars (around $2.36 billion) in cash and marketable securities, representing about a quarter of its current market cap. However, it’s important to realize that this is down from close to CA$5 billion just a few quarters ago, meaning Canopy has aggressively been putting its capital to work through acquisitions and the expansion of existing infrastructure.
But it’s not just Canopy’s dwindling cash buffer that’s worrisome. The company recently dismissed visionary Bruce Linton as co-CEO, has seen its share-based compensation soar in recent quarters, and has contended with relatively flat marijuana sales over the past two quarters. To boot, Canopy’s aggressive acquisition activity is ballooning the company’s goodwill, which now stands at CA$1.93 billion, or 22% of total assets. It’s looking increasingly likely that the company will be unable to recoup all of its goodwill in the years that lie ahead, which may lead to a writedown.
There’s no denying that Canopy Growth has established brands, an intriguing international presence, and plenty of capital at its disposal. But there’s also no certainty as to when the company will be profitable on a recurring basis or who’ll be the CEO to lead Canopy in 2020 and beyond. It’s for these reasons that I believe Canopy Growth remains a pot stock to avoid.