Cannabis stocks got off to a blazing-hot start to begin the year. During the first quarter, the Horizons Marijuana Life Sciences ETF, the very first cannabis exchange-traded fund, gained more than 50%, with over a dozen popular pot stocks rising in excess of 70%.
However, it's been a different story since April began. Marijuana stocks have certainly lost their buzz over the past four months, with supply issues in Canada, tax problems in the U.S., and operating woes wreaking havoc on pot stocks throughout North America. Although the industry offers abundant long-term potential, it's still in the maturation phase of its evolution.
With that being said, there are three marijuana stocks that I'd suggest investors avoid like the plague in the month of August.
Despite my being a shareholder of CannTrust Holdings (NYSE:CTST), it's not a company I would consider putting another dime into until there's better clarity on the company's outlook following its admission of wrongdoing.
For those of you who may not have kept abreast with CannTrust, nearly a month ago the company announced that it had been growing cannabis in five unlicensed rooms between October 2018 and March 2019, with these rooms being subsequently licensed in April. Were this the end of it, it would have been an egregious error, but one that CannTrust had hopes of rebounding from.
However, it's come to light via various reports that fake walls may have been used to obscure cannabis plants growing in these rooms in photographs sent to regulatory agency Health Canada. Additionally, emails appear to show that top executives at CannTrust were fully aware of the illegal grow at the company's flagship Niagara campus in Pelham, Ontario, but allowed it to continue. This is what led CEO Peter Aceto to be terminated with cause by the CannTrust board.
In short, CannTrust's future is very murky at the moment. It has supply deals in place with all of Canada's provinces, which is something only three other pot stocks can say. Further, it could be a top-five grower in Canada, assuming it's allowed to keep its cultivation licenses intact. The concern is, we simply don't know what sort of punishment Health Canada is going to levy on CannTrust. With these questions left unanswered, it'd be best to keep your distance from this stock in the meantime.
Even though it's one of the very few cannabis stocks that's forecast to be profitable in 2019, hemp-derived cannabidiol producer and distributor CV Sciences (OTC:CVSI) is a company I'd suggest you could do without in August.
On one hand, CV Sciences offers a compelling long-term investment case, with the farm bill legalizing industrial hemp production and hemp-derived CBD in the United States. CBD is the nonpsychoactive cannabinoid best known for its perceived medical benefits that, according to the Brightfield Group, could generate average annual sales growth in the U.S. of more than 100% over the next five years (including 2019). That would appear to make CV Sciences a stock to buy, not avoid.
But here's the catch: Last week, Charlotte's Web Holdings (OTC:CWBHF) announced that it had signed its largest distribution deal ever with national grocer Kroger (NYSE:KR). Charlotte's Web, the leading producer of hemp-derived CBD in the United States, will supply 1,350 Kroger family stores (about half of Kroger's national locations) in 22 states with various CBD products. A day later, CV Sciences announced that it, too, would expand into 1,350 Kroger locations in 22 states. The thing is, CV Sciences was already in more than 900 Kroger locations, meaning it’ll now have to share shelf space with market-share leader Charlotte’s Web.
Making matters more precarious, the U.S. Food and Drug Administration has shown its hand on CBD, and it doesn't look as promising as investors had hoped for. While CBD products still have a strong future in the U.S., the FDA is unlikely to give them a full-fledged green light anytime soon. That makes CV Sciences a stock to avoid in August.
The third and final marijuana stock that investors would be wise to avoid like the plague in August is only the largest company in the industry by market cap: Canopy Growth (NYSE:CGC).
Undoubtedly, Canopy offers plenty of long-term competitive advantages. It's probably going to slide in as Canada's second-largest grower, with more than 500,000 kilos of annual output when fully operational, and it has a presence in 16 countries, including Canada. It's also one of four Canadian growers with supply deals in every province, which in Canopy's case totals more than 70,000 kilos a year. Between its superior branding and its massive cash position that totaled almost $3.4 billion as of the end of its most recent quarter, betting against Canopy Growth might sound insane.
However, Canopy Growth is losing money hand over fist. The company reported a mammoth 670 million Canadian dollar net loss in fiscal 2019 (ended March 31, 2019), and Wall Street estimates for the company have tumbled from an expected profit of CA$0.45 per share in fiscal 2021 to an expected loss of CA$0.37 per share in just three months. That means Canopy Growth may very well be one of the last pot stocks to turn a recurring profit.
Furthermore, Canopy Growth's visionary, Bruce Linton, was shown the door as co-CEO early last month. With the board looking for a permanent replacement, it means Mark Zekulin, who served as co-CEO with Linton, will also be stepping down soon. Without that vision to guide Canopy Growth, and the company losing a lot of money, there's nothing on the horizon that makes owning this stock worthwhile.