There aren't too many industries, or individual stocks for that matter, that have outperformed cannabis over the past couple of years. Although the days of throwing a dart at the newspaper and landing a winner are long gone, investors who've held some of the most popular pot stocks for years may find themselves up well beyond 1,000%.

However, success doesn't just bring bullish investors out of the woodwork. It also has a history of attracting skeptics who firmly believe that what goes up, must come down. Since pretty much every next-big-thing investment over the past quarter century has had its bubble burst at some point, being a cannabis skeptic may not be as poor an idea as you might initially think.

A businessman in a suit giving the thumbs-down sign.

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Pessimism is picking up among marijuana stocks

Following a rip-roaring first-quarter that saw 14 very popular marijuana stocks gain at least 70%, the second quarter hasn't been nearly as kind. In fact, May was a genuine buzzkill for the industry, with close to three dozen weed stocks declining by a double-digit percentage. This long-awaited weakness in pot stocks was the opening that skeptics had been waiting for to pounce.

According to the newest data from Morningstar on the number of short shares held by the nearly one dozen pot stocks to have uplisted to the New York Stock Exchange or Nasdaq, more than half saw a double-digit percentage increase from the previous month. The exceptions being Aurora Cannabis, which saw its number of shares held short decline by almost 6 million, along with OrganiGram Holdings and Aphria (OrganiGram is new to the Nasdaq, so the short interest data is incomplete, while Aphria's short shares held rose by less than 10%).

Meanwhile, the following eight marijuana stocks saw their short interest increase, month-over-month, by the following respective percentages in May:

  • Greenlane Holdings: Up 1,487%
  • HEXO (HEXO): Up 87%
  • Village Farms International: Up 69%
  • CannTrust Holdings (CNTTQ): Up 53%
  • Tilray (TLRY): Up 44%
  • Cronos Group (CRON 1.14%): Up 36%
  • Innovative Industrial Properties: Up 17%
  • Canopy Growth (CGC -7.84%): Up 13%

If you're wondering why Greenlane Holdings' short shares held surged by nearly 1,500%, the answer lies with its IPO on the Nasdaq in April. It had fewer than 144,000 shares held short in April since it was a newly listed company, but saw bets against the company surge in May. 

A one hundred dollar bill burning from the inside outward.

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Here's the big reason skeptics expect cannabis to be a buzzkill

The logical question here is, "Why?" Why have pessimists suddenly piled on marijuana stocks, especially considering that the U.S.-China trade war, the main downside catalyst for the broader market last month, isn't going to be a major factor impacting the pot industry?

The answer can likely be found in the bottom lines of most of the pot stocks listed above. Although there are exceptions (ahem, Innovative Industrial Properties), most cannabis stocks are losing money on an operating basis if you strip out gains from fair-value adjustments, as well as one-time benefits and costs. That's a problem given that earnings actually matter now.

And things may not improve in 2019. That's because supply chain issues are prevalent throughout Canada. Regulatory agency Health Canada has been bogged down by licensing, distribution, and sales applications, and there's been a shortage of compliant packaging solutions.

On an individual basis, CannTrust has lost half of its value in less than three months, partially because of a $170 million shelf offering, and also because the company's fourth-quarter loss was significantly wider than expected. During that fourth-quarter report, released in late March, CannTrust announced plans to acquire up to 200 acres of land for outdoor growing purposes. When combined with existing plans for phase 3 expansion of its Niagara property, it painted a picture of substantially higher near-term costs. 

The same is true of HEXO, which reported less-than-stellar third-quarter operating results last week. Although the company's operating loss modestly declined from the year-ago period to 2.22 million Canadian dollars, this included about CA$15.4 million in gains from fair-value adjustments. On a more pure operating basis, HEXO lost more like CA$17.6 million in its latest quarter. 

A cannabis leaf laid atop a hundred dollar bill, with Ben Franklin's eyes peering out between the leaves.

Image source: Getty Images.

Next year could be make-or-break for short-sellers

But 2020 may bring a bit of a bifurcation for this group of big-name marijuana stocks.

For example, Innovative Industrial Properties is already profitable, and should be even more so in 2020. Meanwhile, Wall Street anticipates that HEXO, CannTrust, Greenlane, and Village Farms will also move into recurring profitability. Without digging too deeply into fundamental metrics here, it's a big step for a cannabis company to deliver a profit each quarter, and it could mean that short-sellers are playing with fire.

Yet, some of the most popular cannabis names – Canopy Growth, Tilray, and Cronos Group – may continue losing money in 2020, at least according to the latest consensus estimate from Wall Street. That makes these three potentially attractive short-selling targets.

Canopy Growth has been laying the foundation for its hemp-processing infrastructure in the U.S., and has been attempting to expand its product line domestically and abroad. When combined with acquisition costs, Canopy could lead all major growers in the loss column next year.

Tilray's projected losses in 2020 stem from its unforeseen strategy shift, announced in March. Tilray CEO Brendan Kennedy announced that Canada would no longer be its primary focus. Instead, most future investment would be made in the U.S. (via hemp) and in Europe. This strategy shift is expected to push any shot at recurring profitability out another year.

And then there's Cronos Group, which is still in the process of developing the lion's share of its projected annual cannabis output. With a mere CA$129 million in sales forecast for 2020, mainly on account of its slow ramp-up, Cronos is one of the priciest pot stocks at nearly 57 times next year's sales.

In sum, keep a close eye on cannabis short interest levels. They can be a great gauge of industry pessimism, and can encourage even the most optimistic of investors to better understand the objections toward the companies they own, or are following, in the pot industry.