The marijuana industry had itself one heck of a memorable year in 2018. In particular, it emerged from the shadows as a viable business model after Canada became the first industrialized country in the world to legalize recreational cannabis. We also saw numerous other milestones that included the approval of the very first cannabis-derived drug by the U.S. Food and Drug Administration and the signing of the Farm Bill into law, thereby legalizing hemp and hemp-based cannabidiol oil in the U.S.

The market's worst pot stocks last year

And yet marijuana stocks were mostly a buzzkill. With few exceptions, most marijuana stocks failed to deliver the green to shareholders in 2018, which is disappointing considering how well they'd performed in the two previous years. In fact, 10 pot stocks wound up losing at least half of their value last year.

A tipped-over white bottle filled with dried cannabis that's lying atop a messy pile of cash bills.

Image source: Getty Images.

Listed in descending order, here are 2018's 10 worst-performing marijuana stocks:

  1. Namaste Technologies (OTC:NXTTF): down 75.2%
  2. Wayland Group: down 67.6%
  3. Insys Therapeutics (NASDAQ:INSY): down 63.6%
  4. Aphria (NYSE:APHA): down 61.3%
  5. Radient Technologies: down 60.7%
  6. Liberty Health Sciences: down 58%
  7. VIVO Cannabis: down 57.7%
  8. Emerald Health Therapeutics: down 51.5%
  9. Auxly Cannabis Group (OTC:CBWTF): down 51.5%
  10. Medical Marijuana, Inc. (OTC:MJNA): down 50.1%

The word I like to use for these returns is "yuck!" How, with the cannabis industry making such incredible strides, did these companies face-plant so badly? Let's have a look at a couple of the prevailing themes.

A businessman in a suit holding a neat stack of hundred dollar bills behind his back and crossing his fingers.

Image source: Getty Images.

Short-side reports

With marijuana stocks soaring in the previous two years, 2018 was marked by the release of a handful of damaging reports from noted short-side firms. Among the pot stocks to be slammed by these reports were Namaste Technologies and Aphria.

Namaste, a company in the midst of developing a global cannabis e-commerce platform known as NamasteMD, was accused of wrongdoing in early October in a report from Andrew Left at Citron Research. Left alleged that Namaste had been selling assets to insiders and that the company had purposefully lied to shareholders and regulators by hiding U.S. assets in an attempt to list its shares on a major U.S. exchange (the NYSE and Nasdaq won't allow marijuana companies that operate in the U.S. to list on their exchanges).

For its part, Namaste has unequivocally denied the accusation levied by Citron Research and noted that Citron has a financial interest in seeing Namaste's stock decline since it's a short-side firm that bets against the same companies it releases damaging reports about.

In early December, it became Aphria's turn to go under the guillotine. Short-side firm Quintessential Capital Management and forensic analysis company Hindenburg Research co-authored a report that alleged Aphria had grossly overpaid for "worthless" Latin American assets purchased from SOL Global Investments. Further, the report claims that an Aphria insider had vested interests in all three properties. This made for the second time in roughly nine months that an Aphria acquisition came into question for insider ownership of the acquired assets.

Like Namaste, Aphria has denied any claims of wrongdoing. Unfortunately, investor trust in both companies has been compromised, and it could be difficult to gain back.

A magnifying glass being held over a company's balance sheet.

Image source: Getty Images.

Share-based dilution

Not surprisingly, share-based dilution was an absolute value destroyer in 2018.

Since pot stocks have very limited access to nondilutive forms of financing, they often turn to bought-deal offerings to raise capital and finance acquisitions. A bought-deal offering involves the sale of common stock, convertible debentures, stock options, and/or warrants. Selling stock immediately increases a company's outstanding share count, while convertible notes, options, and warrants can do so over many months or years. The end result is dilution for existing shareholders and, often, reduced earnings per share.

Among the worst-performing marijuana stocks, perhaps none was more impacted by dilution last year than Auxly Cannabis Group.

Auxly began last year strictly as a royalty company. It would provide up-front capital to growers looking to expand their production capacity in return for a percentage of the yield at a below-market cost. Auxly could then sell this weed at market rates and pocket the difference. Since then, Auxly has expanded into grow facility ownership and the retail sale of pot products. But all of this requires a lot of capital, which is something Auxly doesn't have with essentially nominal revenue to date. When the company turned to bought-deal offerings, Auxly's share count ballooned in 2018, all while its share price sank like a stone.

A frustrated investor covering his head with his left hand and holding a tablet displaying a plunging stock chart in his right hand.

Image source: Getty Images.

Investments going sour

Although marijuana stocks have been rising over the past couple of years, not every investment made by publicly traded companies in other public pot stocks has worked out. That's to blame for Medical Marijuana, Inc.'s 50% decline in 2018.

Back in 2016, Medical Marijuana took a 43% stake in little-known cannabinoid drug developer Axim Biotechnologies. At the time of its investment, Axim was trading at around $0.25. Within a few months, Axim would find its way to $20 a share, making Medical Marijuana a genius almost overnight with a ton of built-in equity.

But rather than cashing in its chips, Medical Marijuana hung onto its shares. On Dec. 24, 2018, Axim hit an intraday low of $0.46 per share. Even though Axim's stock has since climbed from its lows, it's down well over 90% from its 2017 highs, taking Medical Marijuana's built-in equity with it.

Worse yet, Axim Biotechnologies, despite having more than a dozen clinical indications listed in its pipeline on its website, hasn't moved many of its cannabinoid therapies into human studies. In short, Medical Marijuana's once-huge investment is looking quite precarious.

A hundred-dollar bill on fire atop a lit stove burner.

Image source: Getty Images.

Poor operating results

Finally, poor operating results are to blame for some of these 50%-plus losses. In particular, drug developer Insys Therapeutics put up one miserable quarter after another in 2018.

Insys was hit on two fronts last year. First, its lead drug Subsys, a sublingual fentanyl-based spray designed to treat breakthrough cancer pain, saw sales crater. That's because Insys had been allegedly encouraging physicians to prescribe Subsys for off-label use. An estimated 80% of the drug's peak annual sales of $330 million was derived from off-label use. Following a settlement with U.S. regulators and multiple arrests, Insys regressed from a profitable company to one that's been losing money hand over fist.

Second, there's the underperformance of Syndros, an oral dronabinol solution for the treatment of chemotherapy-induced nausea and vomiting and of anorexia associated with AIDS. Dronabinol is a synthetic form of tetrahydrocannabinol (THC), the cannabinoid that gets a user high. Once hailed as a drug capable of $200 million or more in annual sales, Syndros barely scraped together $2.6 million in sales through the first nine months of 2018.

Between losing investors' trust with its Subsys shenanigans and Syndros' postlaunch flop, Insys looks to be a dead duck.

Will things get better for these buzzkills in 2019? Only time will tell.

Check out the latest Insys Therapeautics and Aphria earnings call transcripts.