3 Brand-Name Marijuana Stocks Short-Sellers Are Liable to Target

These pot stocks are prime candidates to get smoked by pessimists.

Sean Williams
Sean Williams
Feb 8, 2019 at 8:21AM
Health Care

Don't look now, but marijuana stocks are absolutely on fire, once again. Following a dismal fourth quarter that saw many pot stocks lose a third or more of their value, the Horizons Marijuana Life Sciences ETF, a basket fund with more than four dozen pot stocks, has risen by 56% through the first five weeks of 2019.

One reason for this rally is the realization that the cannabis industry is a legitimate business model now. Sure, not all companies will necessarily be winners, but there are big growth projections attached to this industry. According to a co-authored report from Arcview Market Research and BDS Analytics, global weed sales should increase 38%, to $16.9 billion, in 2019 and push their way to $31.3 billion by 2022.

The other major factor pushing marijuana stocks higher is the growing possibility of reform at the federal level in the United States. Democrats have long had a more favorable view of cannabis than Republicans, and with Democrats taking control of the House for the first time in eight years, there's speculation that we'll see baby steps (e.g., banking reform) in the right direction toward an eventual legalization of pot.

A businessman giving the thumbs-down sign.

Image source: Getty Images.

Short-sellers could target these top pot stocks

As marijuana stocks rise, short-sellers are bound to come out of the woodwork. Put simply, a short-seller aims to make money from an optimist's misfortune. This is an investor who makes money when securities go down and loses money when they head higher.

With valuations beginning to stretch, here are three brand-name pot stocks that short-sellers are likely to target in the weeks and months to come.

Cronos Group

This should come as little surprise, but Cronos Group (NASDAQ:CRON), this year's top-performing marijuana stock through Feb. 5, is likely going to attract added short interest in the weeks that lie ahead. Already with 12% of its outstanding shares held short, Cronos Group becomes a target of choice given its pedestrian production capacity relative to its market cap and the likelihood that profits will be marginal for quite some time.

Understandably, Cronos has been buoyed by an announced $1.8 billion equity investment from Altria (NYSE:MO). If completed, this will give Altria a 45% stake in Cronos, with the option to increase its stake to 55% by exercising warrants it will also receive. The possibility of an Altria buyout, or even a partnership to develop a line of pre-rolled joints or vape products, has certainly been a big reason for Cronos' strength. But there are reasons for concern.

An outdoor cannabis-growing greenhouse.

Image source: Getty Images.

By midyear, Cronos' flagship joint-venture greenhouse, which spans 850,000 square feet, should be complete. This facility will be responsible for 70,000 kilograms in annual capacity, which goes along with the 40,000 kilos it'll achieve from Peace Naturals. Tack on other domestic and overseas grow sites, and Cronos Group could yield around 120,000 kilos a year at its peak.

That would sound great if we were talking about a $1 billion company -- but we're not. Cronos Group has a market cap of nearly $3.9 billion. Investors could purchase pot stocks for a quarter of the valuation as Cronos right now and get virtually the same annual output.

Cronos is also lugging around an unsightly forward price-to-earnings ratio of 478! That's because the company will be spending liberally on product diversification, brand building, marketing, and international expansion opportunities -- and Cronos has lagged badly on the latter relative to its peers. As a fundamental nightmare, Cronos Group is shaping up to be a target for short-sellers.


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GW Pharmaceuticals

Cannabinoid-based drug developer GW Pharmaceuticals (NASDAQ:GWPH) may also draw the ire of pessimists, as evidenced by the increase in shares short from 2.25 million as of Dec. 13, 2018 to 2.78 million on Jan. 14, 2019.

The fire under GW Pharmaceuticals' stock over the past month, aside from just general optimism associated with the market, is tied to the early November launch of the first Food and Drug Administration-approved cannabis-derived drug Epidiolex for the treatment of two rare types of childhood-onset epilepsy. With no other approved medicines for Dravet syndrome (one of the two indications), it's believed that GW Pharmaceuticals' bottom line should benefit substantially. But things may not be as easy as you'd think.

A vial of Epidiolex next to its packaging box and two droppers.

Image source: GW Pharmaceuticals.

To begin with, synthetic cannabinoid therapies that were expected to come roaring out of the gate have fizzled out. Insys Therapeutics brought oral dronabinol solution Syndros to market in the summer of 2017 as a brand-new treatment for chemotherapy-induced nausea and vomiting and for anorexia associated with AIDS. Originally thought of as a $200 million-per-year drug, Syndros is probably going to be lucky if it hits $3.5 million in full-year 2018 sales.

Even GW Pharmaceuticals' Sativex, which is approved as a treatment for spasticity associated with multiple sclerosis in more than a dozen overseas countries, flopped. The history for cannabis-like medicines isn't encouraging.

The other issue is that GW Pharmaceuticals isn't the only rodeo in town. Zogenix is preparing to bring a challenger to the table for both of Epidiolex's indications, and this challenger has thus far dazzled in clinical studies. In other words, GW Pharmaceuticals' runway to success is a lot shorter than investors might realize, which makes its almost $4.8 billion market cap seem frothy. I'd be looking for short-sellers to pounce.

Aphria

Last but not least, Aphria (NYSE:APHA) could find itself a prime target for short-sellers moving forward, especially after more than doubling off of its early December lows.

For those who may not recall, Aphria was put under the guillotine by short-side firm Quintessential Capital Management and forensic-analysis company Hindenburg Research in early December. The co-authored report released by this duo claimed that Aphria had purchased three Latin American assets for an inflated price to the detriment of their investors.

More specifically, the report alleged that these assets acquired from SOL Global Investments had been purchased by SOL Global from shell companies for a fraction of their sales price. And to boot, the chairman of SOL Global is also an advisor to Aphria, creating potential conflicts of interest.

A businessman holding a stack of hundred dollar bills behind his back, with his fingers crossed.

Image source: Getty Images.

Aphria has vehemently denied these claims. Nevertheless, this past week, we witnessed the mini-implosion of Namaste Technologies (OTC:NXTTF) after a portion of Citron Research's short-side report on Namaste turned up factual. Citron pointed out a divestiture of assets in the report that went to a Namaste insider and wasn't disclosed as such.

Following an internal review, Namaste announced this week that it was terminating its CEO Sean Dollinger with cause, sending the stock down by a double-digit percentage. That's certainly enough to get investors thinking once again about Aphria and the numerous questions that have arisen over the past year.

It's worth noting that Vic Neufeld, Aphria's CEO for about five years, decided to step down, so that may remove some of the heat short-sellers have placed on this stock. Nevertheless, there are still plenty of question marks, and pessimists are liable to feed off of that uncertainty.

Check out the latest Cronos and GW Pharmaceuticals earnings call transcripts.