Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

3 Marijuana Stocks Where Investors Have Lost Faith in Management

By Sean Williams - May 23, 2019 at 6:06AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The red warning flag is waving for these three pot stocks.

Although it's still very early in the legalization process, marijuana offers the potential of being a once-in-a-lifetime growth opportunity. After racking up only $5.4 billion in global legal sales in 2015, Cowen Group analyst Vivien Azer foresees $75 billion in worldwide sales pot sales by 2030. If accurate, this would equate to a compound annual growth rate of better than 19%.

On the surface, pretty much all data would suggest that pot stocks should be a resounding success throughout North America. A growing number of Americans favor legalizing cannabis on a broad basis, and more than nine out of 10 support the idea of allowing physicians to prescribe medical marijuana. In our neighbor to the north, recreational weed was legalized in October, while in Mexico, the Supreme Court has guided lawmakers to work on legislation that would green-light adult-use marijuana. It looks like the perfect storm for success.

And yet, as investors, we know all too well that not every company in a fast-growing industry is going to thrive. In fact, some will disappoint investors big-time. Over the past seven months, three marijuana stocks have gone from having the full support of their shareholders to having partially or completely destroyed that faith in management.

A visibly annoyed stock trader who's yelling at his computer monitor.

Image source: Getty Images.

Aphria

By the numbers, Aphria ( APHA ) looks like a downright bargain in the marijuana industry. It's projected to be the third-largest grower in Canada on the basis of peak production (255,000 kilos a year), and has long placed an emphasis on generating positive EBITDA (earnings before interest, taxes, depreciation, and amortization), which suggests that it is trying to keep value creation in mind for its shareholders.

However, investors' love affair with Aphria ended abruptly at the beginning of December when the duo of Quintessential Capital Management and Hindenburg Research released a scathing report alleging fraud at one of the most popular pot stocks. In particular, the report suggested that Aphria grossly overpaid for Latin American assets that were more or less worthless.

An independent review was conducted to fish out the truth from the allegations and ultimately determined that Aphria had paid a reasonable amount for its Latin American assets. However, the review also found that a handful of directors had conflicts of interest with the Latin American acquisition. This finding, among other factors, is what led longtime CEO Vic Neufeld to step down after roughly five years at the helm.

But the story doesn't end there. When Aphria reported its fiscal third-quarter results in mid-April, it announced a 50 million Canadian dollar writedown related to the carrying value of its Latin American assets, which were purchased for CA$195 million. In other words, even after an independent committee found that Aphria had paid a reasonable price for these assets, a separate review requested by the Ontario Securities Commission led to the impairment charge.

How can investors trust Aphria's management when the company is lugging around CA$674.4 million in goodwill (a third of its total assets) and when questions surrounding its acquisitions keep popping up? I don't have an answer to that question, and my suspicion is neither does Aphria's management team. 

A person holding a magnifying glass over a company's balance sheet.

Image source: Getty Images.

TILT Holdings

Another marijuana stock that's been waving the red warning flag for a while is TILT Holdings ( TLLT.F 6.64% ).

After completing a four-way reverse merger in December, and quickly doubling from its lows as of early January, TILT had the makings of being the next hot pot stock. Plus, with four very different business models under one roof -- a Massachusetts dispensary operator, a Canadian pot grower, a cannabis-delivery software company, and a customer-relationship software developer -- there was hope that TILT would have multiple avenues to grow.

Unfortunately, following the company's fourth-quarter operating results, released May 1, the wheels fell off the wagon. The company wound up losing a staggering $552 million in 2018, most of which came on a whopper of a writedown in the fourth quarter -- $496.4 million. 

You see, the oddest thing about TILT was the prospectus filed by the company on Dec. 5, 2018 (the day before it began trading in Canada) detailing what the four companies merged into one would look like. In that filing, TILT Holdings arrived at a pro forma total asset amount of $905 million, as of June 30, 2018... of which $721 million was goodwill. I repeat, 80% of total assets was nothing more than finger-crossing premium. That all came to a head just weeks later when an accounting change shaved off pretty much a half-billion dollars in asset value. Whoopsie!

Making matters worse, two members of TILT's board resigned in April, and its now-previous CEO Alex Coleman very recently stepped down. There's turbulence at the top, and on the balance sheet, which has become all the more reason for investors not to have faith in TILT Holdings. 

A businessman holding a stack of hundred-dollar bills behind his back, while also crossing his fingers.

Image source: Getty Images.

Namaste Technologies

But perhaps the train wreck of all train wrecks has been vaporizer manufacturer and cannabis e-commerce company Namaste Technologies ( NXTTF -6.06% ).

Between the midpoint of 2017 and September 2018, Namaste was a beast. Shares of the company wound up gaining more than 1,500% on the rising tide surrounding derivative products, and its steadily growing number of registrants for its online portal NamasteMD. The company appeared to have a few channels to make bank, and everything was full speed ahead for cannabis in Canada.

But things really began to fall apart for Namaste in October. That's when it was hit with a short-seller report by Citron Research, a company known for short-selling companies it releases negative reports on. Citron's head, Andrew Left, alleged that the company had made a fake claim that it was uplisting to the Nasdaq in order to get investors to buy into the stock, and that then-CEO Sean Dollinger had sold company assets to a related party.

As was the case with the Aphria inquiry, Namaste's board of directors formed a special committee to review these claims. While most of Citron's cries of fraud proved inaccurate, one of its allegations -- that Dollinger had sold company assets to a related party -- turned out to be true. Dollinger was terminated from his role as CEO with cause as a result of this finding.

Furthermore, on March 7, two of the company's board members resigned, possibly signaling the long road that lies ahead for Namaste Technologies. Having once been a very promising and popular pot stock, investor faith in the company and management has mostly been destroyed. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Namaste Technologies Stock Quote
Namaste Technologies
NXTTF
$0.07 (-6.06%) $0.00
Aphria Stock Quote
Aphria
APHA
TILT Holdings Inc. Stock Quote
TILT Holdings Inc.
TLLT.F
$0.30 (6.64%) $0.02

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
624%
 
S&P 500 Returns
140%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/06/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.