For years, marijuana stocks have been the buzzy go-to investment. If investors had the stomach and wherewithal to invest in some of the most popular names back at the beginning of 2016, they'd likely be sitting on gains of more than 1,000% right now. Even investors who bought into the industry during the first quarter made out quite well, with the Horizons Marijuana Life Sciences ETF, which holds more than four dozen cannabis stocks of various weightings, gaining over 50%.
But the past four months haven't been so green for the marijuana industry, with July being a flat-out canna-bust! Last month, the Horizons Marijuana Life Sciences ETF lost almost 12% of its value, with 85% of the nearly five dozen pot stocks I follow declining. Worse yet, 2 out of 3 cannabis stocks lost at least 10% in July.
But among the decliners was a group that we can clearly call the worst of the worst. Six pot stocks wound up shedding at least a quarter of their value in July. Here they are, listed in descending order by their decline.
1. CannTrust Holdings: Down 53.2%
It should come as no surprise that July's disaster du jour was Ontario-based cannabis grower CannTrust Holdings ( CNTTQ 0.00% ), which shed more than half of its value.
Roughly one month ago, CannTrust admitted that it had grown cannabis plants in five unlicensed rooms at its flagship Niagara campus between October 2018 and March 2019 (these rooms became licensed in April). As a result of this admission, regulatory agency Health Canada put 5,200 kilos of inventory on hold, and the company withheld 7,500 kilos of additional inventory at its much smaller Vaughan campus.
Since this announcement, we've learned that fake walls may have been used to purposefully trick regulators from seeing cannabis plants growing in these unlicensed rooms, and that emails suggest management was aware of the illegal growing operations. Not shockingly, Peter Aceto was terminated as CEO, and the company is currently contending with a suspension of sales activity as it awaits its punishment from Health Canada.
While a sale is possible, and CannTrust looks to have puzzle pieces that a suitor would find attractive, the danger of a full license revocation rightly has investors keeping their distance.
2. TILT Holdings: Down 32.2%
Rinse and repeat, because vertically integrated cannabis company TILT Holdings ( TLLT.F 0.93% ) seems to find its way to the biggest losers column more months than it doesn't.
After combining four separate companies in December via a complicated reverse merger, TILT showed early promise. But it also lugged around a smoking gun on its balance sheet: more than $700 million in goodwill, which at the time represented about 80% of the company's total assets. Not long after making its public debut, TILT would wind up writing down $496.4 million of goodwill, and reported a net loss of more than $550 million as a result in 2018.
Unfortunately, things have not gotten better. In July, TILT announced that it had arranged for a $125 million private placement via convertible senior secured notes. Should these notes be converted into shares at some point in the future, it would lead to the share-based dilution of existing investors.
Long story short, TILT is still lugging around quite a bit of goodwill on its balance sheet, and it doesn't appear to have earned shareholders' trust as of yet.
3. FSD Pharma: Down 28.4%
Marijuana penny stock FSD Pharma ( FSDDF ), which has a boatload of outstanding shares, was another sour note in the cannabis space last month. Both current and old issues look to have pushed this tiny tot lower in July.
In terms of older issues, FSD Pharma still hasn't quite recovered from its falling out with Auxly Cannabis Group regarding a joint venture grow farm that they were working on together. Auxly is a reasonably well-financed royalty company that looked to be a perfect partner for FSD. However, after Auxly sent FSD a letter defining numerous deficiencies in their joint venture in January, the partnership was dissolved just weeks later. Without Auxly, FSD loses a big-name in the cannabis-growing space.
The other issue looks to be the closing of FSD Pharma's acquisition of Prismic Pharmaceuticals for $17.5 million on July 2. Although Prismic's drug platform is working on developing non-addictive prescription drugs to counter the opioid crisis, FSD's acquisition led to the issuance of more than 102 million shares of common stock. This dilutive buyout appears to have weighed on FSD's stock in July.
4. MariMed: Down 27.2%
Last year, MariMed ( MRMD 0.00% ) was virtually unstoppable, with its share price more than quadrupling. In 2019, though, MariMed has given up most of those gains, with another 27% loss registered in July.
Unlike CannTrust, TILT, and FSD Pharma, MariMed didn't have that one event you could point your finger at and say, "That's it! That's why the stock was throttled last month!" Rather, the company's steady decline looks to be derived from concerns that it'll be left behind in a rapidly consolidating U.S. market.
For those unfamiliar with MariMed, it had primarily been focused on consulting services, until recently. Nowadays, it's entered and acquired multistate operators in a handful of states, and plans to enter the hemp-derived cannabidiol (CBD) market. On paper, this sounds great.
But while MariMed is busy making this transition, we've observed close to a half-dozen major acquisitions in the multistate operator space, and seen a half-dozen Canadian growers push into the U.S. hemp market. Put simply, MariMed could struggle in a market with much larger players than itself, and that's being reflected in its shrinking share price.
5. Cresco Labs: Down 26%
Similar to FSD Pharma, carryover issues from previous months look to have ransacked Cresco Labs' ( CRLBF 5.00% ) stock in July.
For those who may recall, on April 1, Cresco Labs announced that it would acquire Origin House ( ORHOF ) in an all-stock deal that was then valued at over $820 million. Even though Cresco is a vertically integrated dispensary operator, Origin House brought something to the table that's invaluable: distribution access to Californian dispensaries. As one of the few distribution license holders in the Golden State – a state that leads all others in total legal sales – Cresco aims to use Origin House as a vehicle to get its branded products into more than 500 licensed dispensaries in California.
There are, however, two concerns with this deal. First, it's an all-stock deal, which means share-based dilution. Yes, there's value gained from the addition of Origin House, but there's probably also quite a bit of premium built into this deal, too.
The other worry is that the deal still hasn't been given the green light by the U.S. Justice Department Antitrust Division. While unlikely that it won't get the green light, there's obvious near-term concern about the delay of this deal.
6. Green Growth Brands: Down 25.5%
Not to sound like a broken record, but Green Growth Brands ( GGBXF ), the final canna-bust on the list from July, has earned its place among the top losers because of (drum roll) share-based dilution.
On July 9, Green Growth Brands announced the acquisition of MXY Holdings for $310 million. With Green Growth already pushing into shopping centers and popular mall-based retailers with its CBD products, the addition of MXY Holdings adds tetrahydrocannabinol (THC) offerings as well that are distributed in more than 250 U.S. dispensaries.
The problem is that Green Growth doesn't have the cash finance such a deal (and this is often the case with most pot stocks). Although the deal is complicated, the main gist is that Green Growth is issuing stock, as well as providing warrants, to help pay for it. This could mean a whole lot of dilution for existing shareholders, as well as the possibility of these warrants being executed down the road, if the share price of Green Growth rises.
Two weeks after the MXY deal, Green Growth announced a bought deal public offering totaling about 50 million Canadian dollars. Long story short, long-term shareholders are drowning in share issuances and paying the price.