The marijuana industry has had a groundbreaking year in so many ways. We've seen Vermont OK the use of recreational pot via the legislative process, had the Food and Drug Administration approve the very first cannabis-derived drug, had multiple marijuana stocks uplist to the NYSE or Nasdaq, and on Oct. 17 saw Canada legalize recreational cannabis. That's a very good year for the legalization movement and presumably for investors.
However, in classic "buy the rumor, sell the news" fashion, marijuana stocks nosedived in October. Specifically, they rallied until the day prior to Canada's legalization then began a two-week-long tumble.
Cannabis carnage in October
By month's end, the industry could be best described as a "marijuana train wreck." Of the 33 largest and most popular marijuana stocks, a mere three finished higher, with 27 falling by a double-digit percentage and 19 (yes, nineteen!) falling by at least 20%. Mind you, a 20% decline from a recent high would be construed as a bear market.
In descending order, here are the worst-of-the-worst pot stocks from October:
- India Globalization Capital (NYSEMKT:IGC): down 61.4%
- The Green Organic Dutchman (NASDAQOTH:TGODF): down 57.2%
- Green Thumb Industries: down 38%
- VIVO Cannabis: down 34.2%
- Tilray: down 34%
- FSD Pharma: down 33.9%
- HEXO Corp.: down 33.4%
- Cronos Group: down 33.3%
- Aleafia Health: down 31.9%
- Supreme Cannabis Company: down 31%
- Namaste Technologies: down 29.9%
- Aurora Cannabis: down 29.2%
- CannTrust Holdings: down 29%
- Canopy Growth Corp. (NYSE:CGC): down 24.2%
- Cara Therapeutics: down 21.8%
- GW Pharmaceuticals: down 20.4%
- Auxly Cannabis Group: down 20.4%
- iAnthus Capital Holdings: down 20.1%
- OrganiGram Holdings: down 20.1%
While the entire industry took a bath in October, three trends certainly stood out, at least among the worst pot stocks.
Growers were clobbered across the board
One trend, without question, is that cannabis growers were all hit pretty hard. The best performer among the top-10 estimated producers by peak yield was Aphria, and it ended down by a little over 14%.
Why were growers hit so hard in October? It probably has to do with the industry coming of age. Sure, it's a bit of a tough lesson for investors to learn, but with recreational marijuana now legal in Canada, the time for promises is over. Rather, investors are going to want to see tangible sales and profit growth -- the latter of which could be hard to come by for a few years.
For example, Canopy Growth Corp. brings a number of advantages to the table for investors. It'll likely be the second-biggest producer by peak production given that it has 5.6 million square feet of grow space being developed. It also has a diverse set of channels to sell its product, and is tied at the hip with Constellation Brands, which made a $3.8 billion investment in Canopy Growth back in mid-August.
But what Canopy Growth doesn't have is recurring profits. It'll be spending so aggressively on capacity expansion and its international infrastructure that it might continue losing money well into 2020. Add this to initial (but expected) product shortages, and Canopy's income statement could disappoint. It's no wonder growers have taken it on the chin in October.
Companies without any tangible production were hit hardest of all
Given that investors want tangible results, pot stocks with nothing to offer but promises at the moment were absolutely ravaged in October. I'm looking at you, India Globalization Capital and The Green Organic Dutchman.
India Globalization Capital was up well over 1,000% in just a few weeks after announcing its intent to enter the cannabidiol (CBD)-infused energy drink market. CBD is the non-psychoactive component of the cannabis plant best known for its medical benefits. Then again, India Globalization Capital's CBD-beverage idea doesn't exactly fit in with its other off-the-wall operations, which include researching a lone cannabinoid drug for Parkinson's disease, and its legacy infrastructure operations that traded in steel and iron ore. This head-scratcher of a pot stock was doomed from the start, and it received notice last week of delisting from the NYSE.
Then there's The Green Organic Dutchman, which is expected to be the fourth-largest producer by annual yield at 195,000 kilograms. There's just one problem: It won't even register its first sale until sometime in the first half of next year. The Green Organic Dutchman is so far behind its peers in production that it runs the risk of losing out on most lucrative supply deals. In sum, I'm not one bit surprised it was more than halved in October.
Ancillary stocks with brand-name appeal fared best
On the other hand, ancillary marijuana stocks (i.e., companies that don't directly deal with the cannabis plant) or brand-name companies with minority exposure to the pot industry, tended to outperform in October.
Notably absent from the list of worst performers above are names like KushCo Holdings, Innovative Industrial Properties (NYSE:IIPR), and Scotts Miracle-Gro (NYSE:SMG), which fell approximately 11%, 15%, and 15%, in October. Mind you, the stock market indexes dipped anywhere from 6% to 10% last month, so the performance of these volatile ancillary pot stocks wasn't markedly worse.
For instance, Innovative Industrial Properties is a cannabis real estate investment trust that owns medical marijuana facilities and leases them out for 15 years, on most occasions. With built-in rental increases and a management fee, Innovative Industrial Properties has created a platform to generate predictable cash flow for a long time, while also taking advantage of the demand for cannabis in the United States. Most important, it's already profitable, which means investors are getting the tangible results they desire.
Meanwhile, Scotts Miracle-Gro was only reliant on its Hawthorne Gardening subsidiary for 11% of total sales in 2017. Hawthorne provides hydroponic, lighting, soil, and nutrient solutions to the medical cannabis industry. Though Hawthorne has struggled a bit in 2018, Scotts can lean back on its core lawn and garden business to do the heavy lifting, once again providing the tangible results that marijuana investors crave.
Volatility should be expected with pot stocks, but ancillary players and brand-name companies look poised to best survive whatever is thrown their way.
Sean Williams has no position in any of the stocks mentioned. The Motley Fool recommends Auxly Cannabis Group, CannTrust Holdings Inc, Constellation Brands, Hexo., Innovative Industrial Properties, KushCo Holdings, Namaste Technologies, Nasdaq, and OrganiGram Holdings. The Motley Fool has a disclosure policy.