For the past couple of years, the marijuana industry has been a big moneymaker. Investors who had the wherewithal and stomach to buy into cannabis stocks well in advance of Canada's legalization are likely sitting on handsome gains right now.
But the tide has decisively turned since the beginning of April. Over the past four-plus months, most cannabis stocks have significantly retraced from their highs, leaving many pot stock investors to scratch their heads in disbelief. Persistent supply issues in Canada, a resilient black market in select U.S. markets, and current weakening market sentiment have all worked to push marijuana stock valuations lower.
As recently as a few months ago, there were 17 cannabis stocks that sported a psychologically important market cap of at least $1 billion. Today, far fewer pot stocks have a billion-dollar valuation. Here are three such marijuana stocks that have recently lost their status in the billion-dollar valuation club.
Arguably one of the most popular cannabis stocks to be clobbered in recent months is Quebec-based grower HEXO (NYSE:HEXO). Since hitting an all-time high in late April, HEXO's share price has effectively been cut in half through Monday, Aug. 5.
Why the about-face? The answer looks to be mostly related to supply issues that have plagued the Canadian landscape.
Regulatory agency Health Canada has struggled to keep up with a large backlog of licensing applications that, when combined with compliant packaging shortages, has kept cannabis out of licensed stores in many provinces. These persistent supply issues reared their head in HEXO's fiscal third-quarter operating results, which featured a modest sequential quarterly decline in cannabis sales and a considerably larger operating loss, if fair-value adjustments on biological assets are removed from the equation.
There is, however, hope that HEXO will regain the $1 billion valuation mark in the future. That's because it's one of the most de-risked pot stocks in Canada, thanks to a 200,000 kilo-in-aggregate supply deal with its home province of Quebec over a five-year stretch (through 2023). Taking into account HEXO's ongoing ramp up, this wholesale supply agreement could account for 30% of the company's total production through 2023. That should lead to plenty of predictable cash flow.
HEXO also has a strong focus on the derivative market for cannabis products. A number of new consumption options are set to launch by mid-December, and HEXO will be ready.
It has a joint venture in place with Molson Coors Brewing to develop nonalcoholic cannabis-infused beverages, has third-party extraction deals in place for cannabis and hemp biomass, and has over 600,000 square feet devoted to processing and extraction. Suffice it to say, HEXO remains an intriguing cannabis stock, even without a $1 billion market cap.
A second popular marijuana stock to have significantly peeled back from its billion-dollar market cap is Atlantic-based OrganiGram Holdings (NASDAQ:OGI). Shares of OrganiGram have retraced by more than 30% in less than three months.
The culprit for OrganiGram is much the same as it is for HEXO -- supply issues throughout Canada. Even though OrganiGram is one of four pot growers with supply deals in all of Canada's provinces, it wasn't enough to save the company from a slight sequential decline in cannabis sales in the company's fiscal third quarter. OrganiGram also swung from a year-ago profit to a loss in its most recent quarter.
But also like HEXO, OrganiGram has shown plenty of promise and it appears likely to regain its billion-dollar valuation when its operating results demonstrate signs of improvement. This is a good time to mention that without the drag of fair-value adjustments on biological assets in the third quarter, OrganiGram would have otherwise eked out a small operating profit.
OrganiGram should also slot in as one of the most efficient growers. The company expects to produce 113,000 kilos at peak capacity, yet will be utilizing less than 500,000 square feet of growing space at its Moncton campus in New Brunswick. This should work out to a yield per square foot of about 230 grams. In terms of growing efficiency and expected profitability among growers, OrganiGram will be tough to beat.
Lastly, U.S.-focused multistate dispensary operator Acreage Holdings (OTC:ACRGF) has lost more than half of its value since the beginning of May. It now sits more than $70 million below a $1 billion market cap.
Unlike HEXO and OrganiGram, which have dealt with supply issues, Acreage Holdings' weakness can mostly be traced to its tie-ins with Canopy Growth (NASDAQ:CGC), the largest marijuana stock in the world by market cap. You see, Canopy Growth agreed to acquire Acreage Holdings in mid-April for $3.4 billion on a contingent-rights basis. The contingency of the deal is that the U.S. federal government would have to legalize marijuana. Under the terms of the now agreed-upon deal, Acreage shareholders received $300 million upfront ($2.55 in cash per share), with Canopy's stock being used to finance the remainder of the deal.
The issue here is twofold. First, Canopy Growth has shed 40% of its value since April 29, meaning the value of this deal isn't as high as it once was. Canopy is in the process of looking for a permanent CEO and reported a whopping 670 million Canadian dollar full-year loss in fiscal 2019. In short, Canopy's share price may continue to weigh on Acreage Holdings since they're somewhat tied at the hip by the contingent-rights deal.
Secondly, it's not looking too promising that the U.S. federal government will consider legalizing marijuana anytime soon. I have a laundry list of reasons why you should expect the can to be kicked further down the road, thereby providing no windfall sales surge for either Acreage or its acquirer.
For the moment, it's unclear if or when Acreage Holdings will reclaim the psychologically important billion-dollar valuation level.