For years, cannabis stocks have been showing investors the green. Early investors in some of the most popular pot stocks are likely sitting on triple-digit or quadruple-digit gains today, with more than a dozen cannabis stocks gaining at least 70% during the first quarter.

However, the green rush has come to a crashing halt since April began. Few cannabis stocks are near their 2019 highs, with most registering double-digit losses during the month of July.

A gloved processor with scissors trimming a cannabis flower.

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Marijuana stocks have clobbered investors over the past four months

Yet, what might be truly surprising is just how much market value has evaporated from the industry's best-known stocks since this downtrend began in April. As of April 25, there were 14 pot stocks with a $1 billion valuation or larger -- 10 of which surpassed $1.8 billion. As of the market close on Aug. 19, here's how much market value has been erased from each of the 10 biggest marijuana stocks as of April (listed in descending order by market cap lost):

  • Canopy Growth (CGC 0.59%): $7.39 billion
  • Aurora Cannabis (ACB -1.58%): $3.36 billion
  • Tilray (TLRY): $2.04 billion
  • Curaleaf Holdings: $1.77 billion
  • Acreage Holdings: $1.74 billion
  • Cronos Group: $1.54 billion
  • Harvest Health & Recreation (HRVSF): $1.27 billion
  • Cresco Labs: $0.83 billion
  • Aphria (APHA): $0.38 billion
  • GW Pharmaceuticals: $0.35 billion

Collectively, that's $20.67 billion in market cap that's been erased in roughly four months' time. To put this into context, the aggregate value of the 10 biggest pot stocks on April 25 was $55.1 billion. Today, that's been cut to $34.4 billion.

A cannabis leaf laid within the outline of the Canadian flag's red maple leaf, with rolled joints and a cannabis bud to the left of the flag.

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Four reasons pot stocks have been a money pit since April

What's interesting about the decline in pot stock valuations is that there isn't one problem that can be singled out or blamed for the drop. Rather, it's a confluence of four factors that have collectively weighed on the industry.

1. Supply problems in Canada

Arguably the most front-and-center issue for Canadian cannabis stocks has been persistent supply concerns throughout the country. Regulatory agency Health Canada had more than 800 licensing applications to review at the beginning of the year and is taking months, to possibly more than a year, to approve growing, processing, distribution, or sale licenses. When combined with compliant packaging shortages, it's led to cannabis not reaching dispensary shelves.

On the bright side, Health Canada has implemented changes to its application review process that should (pardon the pun) weed out underfunded companies and expedite licensing approvals for larger pot stocks. Even so, it's going to take a couple of quarters for Health Canada to work through its existing licensing backlog, which likely means an ongoing supply shortage for dried flower, as well as derivatives, when they launch by mid-December.

A one hundred dollar bill burning from the center outward.

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2. Subpar operating results

With Canada legalizing recreational marijuana, and 11 U.S. states having passed adult-use consumption laws, another problem is that earnings actually matter now. And frankly, cannabis stock operating results have been dreadful.

For instance, the largest marijuana stock in the world, Canopy Growth, reported its fiscal first-quarter operating results two weeks ago, and virtually nothing in its report could be spun as a positive. Canopy recorded a sequential quarterly revenue decline and anemic gross margin of 15%, saw its goodwill increase by 387 million Canadian dollars to CA$1.93 billion, and has seen its share-based compensation soar. To put the icing on the cake, Canopy Growth's visionary co-CEO was fired in early July, and there's really no telling when the company will be profitable on an operating basis.

There's also Tilray, which has been in free fall since reporting its second-quarter operating results. Despite topping Wall Street's consensus sales estimate, Tilray's loss was, once again, wider than expected, with the company recording a subpar gross margin of 23%. Tilray has had to purchase wholesale dried flower to meet supply agreements, which continues to be a drag on its margins.

An investor holding a magnifying glass over a company's balance sheet.

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3. Share-based dilution

A third factor that's been responsible for shrinking marijuana stock market caps is ongoing share-based dilution. Since U.S. pot stocks have virtually no access to non-dilutive forms of financing, and Canadian marijuana stocks only gained this access about a year ago, most capital raises have involved issuing stock. The problem is that issuing stock often dilutes the value of existing shareholders, and it signals the very real possibility that additional capital raises may be on the horizon.

Take Aurora Cannabis as a good example. Aurora has been busy acquiring companies left and right for the past three years, and is currently on track to be Canada's leading producer by peak production. But in the process, the company has ballooned its outstanding share count by 1 billion shares in roughly five years. Even though Aurora continues to add value by purchasing new pieces to its global puzzle, investors remain leery of the company issuing stock to finance these deals. With each share issuance, it becomes that much harder for Aurora Cannabis to generate a meaningful per-share profit, and that's been reflected in its shrinking market cap.

And don't think this is purely a Canada problem. Harvest Health & Recreation has agreed to acquire privately held Verano Holdings for $850 million, and has made a number of smaller deals. But with virtually no financing options beyond share issuances, Harvest Health has been using its stock as currency to make these deals happen. This ongoing dilution has more than halved Harvest Health's market cap since April 25.

A businessman in a suit holding a pile of cash behind his back with his fingers crossed.

Image source: Getty Images.

4. A lack of investor trust

Lastly, investors have clear trust issue with marijuana stocks.

As you may recall, Aphria was clobbered in December after a short-seller report emerged claiming that the company had grossly overpaid for its Latin American assets. Even though an independent committee didn't find this to be true, Aphria wound up taking a CA$50 million writedown on the value of its Latin American assets just months later. Further, a few Aphria executives, including longtime CEO Vic Neufeld, wound up stepping down after conflicts of interest came to light concerning this Latin American acquisition.

There's also the ongoing CannTrust (CNTTQ) scandal, which has really taken the wind out of the sails of pot stocks. CannTrust grew cannabis in five unlicensed rooms for a period of six months (October 2018 to March 2019), and it would appear that executives knew about this deception, yet didn't stop it. CannTrust is currently waiting on a ruling from Health Canada, but there's clear concern that it may not be the only bad apple of the bunch.

All of these factors point to the need for cannabis stocks to mature before they have any real shot of creating long-term value for investors.