In case you haven't noticed, marijuana stocks have been nothing short of unstoppable through the first two months of 2019. The Horizons Marijuana Life Sciences ETF, the first-ever cannabis exchange-traded fund that holds around four dozen pot stocks, is up 60% year to date. This optimism is the result of Canada's recreational legalization in October, and continuing state-level approvals in the United States.
But as investors, we also know that not every company can be a winner. Of the 50 marijuana stocks I screened for in February, 26 ended higher, while 24 ended the month lower. Of these underperforming pot stocks, five really stood out, producing losses of at least 16% for February. In descending order, here are the weed industry's worst performers.
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Namaste Technologies: Down 24%
While pot stocks have been virtually unstoppable to begin the year, Namaste Technologies (NXXTF) has been the rare exception. Namaste, which sells vaporizers and operates a medical cannabis portal known as NamasteMD, cratered 24% in February.
To understand why Namaste fell off a cliff, you'll first need some background. Back in October, short-seller Citron Research published a note that proclaimed Namaste to be a fraud. Citron alleged that Namaste made fake claims of a Nasdaq listing to get people to buy its stock, and that CEO Sean Dollinger had divested company assets to an insider without proper disclosure. Namaste decided the best course of action was to form a special committee that would investigate these claims.
Now, fast-forward to the first week of February, when the committee released its findings. Namaste issued a press release noting that while the allegations of fraud with regard to its potential Nasdaq listing had no merit, there were conflicts of interest with the divestiture of Dollinger Enterprises going to a related party. Dollinger was terminated as CEO with cause, and the company noted its intent to review all strategic alternatives, which may include a sale. With at least part of Citron's report proving accurate, Namaste has lost the trust of investors, and its near-term future is clouded, at best. In short, keep your distance.
Check out the latest earnings call transcripts for the companies we cover.
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New Age Beverages: Down 18%
Despite an incredible 2018 that saw New Age Beverages (NBEV) buck the stock market's weakness and more than double, the beverage maker's luck ran out in February, as evidenced by its 18% decline.
Why the drop? Unlike Namaste Technologies, there aren't readily apparent red flags. Rather, it looks to be a combination of growing short interest and competition.
According to data provided by Morningstar, the number of shares held by short-sellers rose to 17.27 million, as of Feb. 14, 2019, up from 15.6 million exactly one month earlier. With a float of only 61.75 million shares, it means that more than a quarter of the outstanding float is being held by pessimists. This would certainly explain New Age Beverages' steady downtrend in February.
The other possible reason for weakness could be the growing number of companies entering the cannabidiol (CBD) beverage space. (CBD is the nonpsychoactive cannabinoid best known for its medical benefits.) Although hopes are high that CBD beverage sales will soar, New Age Beverages' non-CBD beverage line fell flat in 2018, and the company has been consistently losing money. In other words, growing competition could stamp out any chance this small-cap CBD beverage company has of putting itself on the map.
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Auxly Cannabis Group & FSD Pharma: Both down 16%
The third- and fourth-worst performers, which I've chosen to list together for reasons that I'll get to in just a moment, are Auxly Cannabis Group (CBWTF 2.43%) and FSD Pharma (FSDDF), both of which plunged 16% last month.
In March 2018, Auxly, which is predominantly a streaming company that provides upfront capital to growers in exchange for a percentage of their yield at a below-market rate, entered into a joint venture with FV Pharma, a subsidiary of FSD Pharma. Initially, FV Pharma was to use the capital it received from Auxly (7.5 million Canadian dollars) to construct a 220,000-square-foot cultivation facility, with Auxly Cannabis set to receive 49.9% of the yield. On paper, it looked like a match made in heaven. But on Feb. 7, 2019, the two "broke up."
According to a press release issued by Auxly Cannabis, on Jan. 17, 2019, it provided FSD Pharma notice of certain contractual breaches and construction deficiencies associated with the joint venture facility. FSD Pharma responded on Feb. 7 by ending its joint venture with Auxly Cannabis. For its part, Auxly has more than a dozen streaming deals and a handful of owned grow farms, so this isn't necessarily a damning outcome. For the smaller FSD Pharma, it could be a bigger deal now that it's without a greenhouse investment partner.
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Canopy Rivers: Down 16%
In January, no pot stock performed better than Canopy Rivers (CNPO.F 14.29%), which was spun off from Canopy Growth last year. The company, which primarily invests in cannabis businesses that are looking for financial or operational support, gained more than 90% in January. In February, though, it gave 16% of its value back.
Arguably the biggest negative for Canopy Rivers last month was a capital raise than netted CA$93.5 million in gross proceeds. Although CA$30 million of this came from Canopy Growth purchasing 6.25 million subordinated voting shares, the remaining CA$63.5 million in gross proceeds was the result of a bought-deal offering that saw 13.23 million shares sold at a 16% discount to the company's closing price on the day prior to the announcement. In simpler terms, this was a share-based dilution issue.
It's also possible that Canopy Rivers' third-quarter operating results failed to impress. Released on Feb. 27, the company recorded CA$0.01 in EPS, which was far lower than the CA$0.23 in EPS recorded in the year-ago quarter. Further, the company experienced an operating net cash outflow of CA$1.6 million, compared to a much smaller net cash outflow of CA$0.3 million in the third quarter last year. Though by no means a bad quarter for a cannabis-focused investment company trying to find its footing, profit-taking was the name of the game in February.
