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Is The Pot Stock Boom Over Already?

Pot Stock Boom

With Mexico on the brink of legalizing recreational marijuana, you would think it would be great news for the cannabis industry, but stocks are getting crushed, and some of the biggest industry darlings are even flirting with penny stock status at this point. 

This industry is forecast for growth that could generate some $200 billion in annual sales by 2030. So what gives?

Canada has legalized recreational marijuana, but the industry hasn’t been able to get in front of supply issues, and the regulators can’t keep up, either. These are early days and no time was allotted for ironing out the kinks in the chain. Growers aren’t meeting expansion needs fast enough, and retail stores are too few. In short, it’s chaos, and no one’s offering anything resembling order yet. 

The general consensus is that cannabis--at large--is a great long-term bet, but today’s weed companies are extremely risky in the near term. That either makes them a fabulous buy right now, or it means that the first wave of cannabis companies may die a painful death and make room for new entrants who can do it right the first time. 

The problem with this space is that they all drag each other down. A downgrade in this space is sector-wide. At times, this seems to be a single ship that’s sinking, but there are still a few potential treasures to find in the wreckage.  

Here are the Top 3 stocks in the cannabis space, and how they are, or aren’t, surviving the culling: 

#1 Canopy Growth (NYSE:CGC)

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Canopy is the market leader. It’s the largest marijuana stock by market cap; so it’s not a good sign. 

This sinking ship took Aurora down with it. Jefferies downgraded CGC last Friday, citing a “number of negative headlines” that have impacted the sector in the past six months, “as well as few signs of profitability”. 

The analysts downgraded to ‘underperform’ and slashed their price target on CGC to CAD$25 (US$18.8) from CAD$77. That was the sound of the bell tolling. 

All told, Canopy has lost more than 60% this year and posted horrifying Q1 results. 

This stock was truly experiencing the high life in late 2017, when alcoholic beverage giant Constellation Brands jumped on board promising a series of cannabis beverages once regulations were in place. That show of confidence sent investors piling into Canopy. 

But the party didn’t last. Investors don’t appear to be keen on CGC putting too many of its eggs in the beverage basket. And in the meantime, Canopy’s sales projections are consistently declining in the infrastructure chaos. 

Now, the big question is how much further can Canopy fall? $20 isn’t necessarily its bottom. 

#2 Aurora Cannabis (NYSE:ACB)

(Click to enlarge)

‘Ouch’ is probably an understated way of expressing how Aurora investors are feeling right now. The stock has lost over 60 percent in 12 months. Last week alone it shed over 16 percent.  Related: Another Retail Giant Bites The Dust

The Canadian medical marijuana grower still looks cheap, but it isn’t, really. Even at today’s price, Aurora is still trading at 500x forward earnings. Profit is still far from reality.  

#3 Aphria Inc. (NYSE:APHA)

(Click to enlarge)

Amid the wreckage, Aphria actually performed well in August, showing a spike in revenue and actual profit. That makes Aphria the only existing pot company that’s actually turning a profit. 

That’s because it acquired Germa medical cannabis distributor CC Pharma earlier this year. 

On October 15th, Aphria reported results of its fiscal first quarter, with numbers that blew away analysts’ expectations on earnings. Analysts were expecting a loss. What they got instead, was revenue up 849%, net income down 23% and non-GAAP EBITDA up 125%. 

With these numbers, Aphria has become the dominant low-cost player on the Canadian scene. It’s got strong margins and its selling its wares at a discount to its rivals. 

The Jefferies analysts added that the next 12 months will be pivotal for the fortunes of many cannabis companies as markets continue separating the winners from the losers. The analysts bring up a point I’ve frequently mentioned regarding marijuana companies: the ability to execute.

By Michael Kern for Safehaven.com

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