The marijuana industry has been nothing short of unstoppable in recent years. In 2016 and 2017, pot stocks soared on the expectation that Canada would eventually legalize recreational weed. Then, in 2018, Canada did so with the passage of the Cannabis Act. This move validated the marijuana industry as a legitimate business model and confirmed to investors that it would be around for a long time to come.
Since we know the cannabis industry is legitimate, now comes the hard part: picking the marijuana stocks that'll turn out to be long-term winners. Clearly, not every pot stock is going to head higher or have longevity on its side. But some marijuana stocks may get trampled before getting too far out of the gate.
Image source: Getty Images.
Short-seller Citron Research's report on Namaste yields some truth
On early Monday morning, Feb. 4, Namaste Technologies (NXTTF 1.45%), a small-cap cannabis company known best for selling vaporizers and starting up a medical cannabis portal known as NamasteMD, issued a press release that announced the termination of its CEO Sean Dollinger, with cause. Before we get to the specifics of this press release and why Dollinger was relieved of his leadership role, it helps to have some background on why this press release was necessary.
Back in October, noted short-seller Citron Research, which is headed by Andrew Left, released a report alleging that Namaste Technologies was a "complete fraud." Left accused Namaste of making a "fake claim of a Nasdaq listing to get investors to buy the stock" and, more importantly, claimed to have uncovered a related party sale tied to the company's divestiture of Dollinger Enterprises in Nov. 2017.
With Citron's report putting a sizable dent in Namaste's share price, the company's board felt the only prudent action was to form a special committee to investigate these claims. When the committee completed its review, it found one of the accusations had merit. According to Monday's press release, Dollinger had sold Dollinger Enterprises to Namaste executive David Hughes. Since both parties are insiders and have a vested interest, and this interest wasn't disclosed, that's a no-no in the publicly traded business world. As such, Sean Dollinger has become the ex-CEO of Namaste Technologies, with Meni Morim, previously the company's chief product officer, ascending to the role of CEO.
Check out the latest earnings call transcripts for companies we cover.
Image source: Getty Images.
But that's not the end of it. In addition to a shake-up at the top, Namaste has also initiated a strategic review process to "consider all value-maximizing alternatives." In plain English, the company may put itself up for sale, albeit there's no timetable on when the strategic review will be complete. Needless to say, a sale might sound great for investors, but the company is far from pricing itself in a position of strength. With wrongdoing exposed at the CEO level, it may struggle to find buyers. And even if it does find willing takers, there'd unlikely be much (or any) premium attached.
Is Aphria next?
However, Namaste shareholders aren't alone. While we'd like to think that the management teams of all marijuana stocks are doing what's in the best interests of their shareholders, this may not always be the case.
In December, short-side firm Quintessential Capital Management and forensic analysis company Hindenburg Research co-authored a report that called into question three Latin American purchases by Canadian grower Aphria (APHA +0.00%). According to Quintessential and Hindenburg's report, Aphria paid an overinflated price for three assets from SOL Global Investments that had previously been acquired from shell companies for a fraction of the price. What's more, the report alleges that SOL Global chairman Andy DeFrancesco is an advisor to Aphria, ergo he was a vested party to all three assets. In other words, it has a very similar feel to what happened with Namaste.
Image source: Getty Images.
Making matters worse, this was the second time in less than 10 months that an Aphria acquisition was called into question. In March, just a day prior to the company closing its 425-million-Canadian-dollar acquisition of Nuuvera, it was disclosed that now-former CEO Vic Neufeld and other insiders at Aphria held positions in Nuuvera. While it's not unheard of for the management team of one company to hold an equity stake in a company that they're buying, Wall Street and investors would certainly want to know about it in advance to determine if the company is acting in the best interest of its shareholders. Rather, they found out just a day in advance.
Not long after the release of this report, Vic Neufeld announced he'd step down as CEO after a roughly five-year run at the helm. This, however, may not solve Aphria's problems or bring back trust among investors, despite the company vehemently denying Quintessential's and Hindenburg's claims.
All your buds in one basket is a dangerous approach
Long story short, this is going to be a wild ride for marijuana stock investors. If you're going to dip your toes into the water, you'll have to be aware that you could lose a significant amount of your initial investment. Should you still decide to take part in the green rush, your best bet is likely to be a basket approach. Rather than placing all of your eggs in one or two marijuana stocks, buy a handful and hang on. This way you'll still be in decent shape, even if a Namaste winds up in your portfolio.
