Things were looking good for Acreage Holdings (OTC:ACRGF) earlier this year when it reached an agreement with Canopy Growth (NYSE:CGC) that would see the two companies come together and form a potential powerhouse in North America. It came with a significant caveat, however, which was that marijuana would have to be legalized in the U.S., otherwise there would be some significant legal problems given that cannabis is still illegal in the U.S. at the federal level. There was a lot of excitement surrounding the companies and the potential they might be able to realize together.
What's happened since?
In short, nothing has taken place since then. Ultimately there's nothing either company can do but continue with its day-to-day operations and wait for the U.S. government to legalize marijuana, which at this point does not appear to be imminent. Most Democratic presidential candidates have expressed support for legalizing marijuana, but not all. There's simply no reason to believe that there will be a resolution anytime soon, and as exciting as it may have been for shareholders to sign off on the deal, it could still be years away from happening. That reality has likely started to set in.
It didn't help that one of the main people driving that excitement and the deal itself, Bruce Linton, ended up being fired from his position as co-CEO of Canopy Growth not long after Acreage shareholders approved the contingent deal. That decision seems to have been spurred by the company's disappointing Q4 results, which did not sit well with the company's key shareholder, Constellation Brands (NYSE:STZ). Things only got worse in July when the CannTrust Holdings scandal hit and helped pile even more negativity atop marijuana stocks in general.
Then, in August, Acreage released its second-quarter results, which unfortunately included a loss of $34 million, compared to a profit of $6 million the year before. Sales growth of just under $15 million was no match for the company's operating expenses, which shot up by $47 million. And with the spotlight on cannabis earnings brighter than ever before, it gave investors another reason to sell the stock and send it down even further in price.
Has the sell-off made Acreage a bargain?
With Acreage Holdings having fallen so sharply in just a short time, investors may be wondering if now is a good time to buy the stock. Although the company is coming off a recent disappointing earnings report, losses have unfortunately been the norm for much of the industry. Investors also should have been well aware of how long the deal with Canopy Growth could take to materialize.
Now that Acreage is at a market cap of around $720 million, it could be a good buy. Investors are paying around 15 times normal sales for the stock, a modest multiple compared with what we've seen in the past for some marijuana stocks. Acreage also has a growing presence across the U.S. -- with pending acquisitions it has access to 20 states, and it has ample additional growth opportunities, even if the deal with Canopy Growth doesn't happen for a while. However, given that the stock still suffered losses in the past month, investors may want the bleeding to stop before they're willing to take a chance on the stock.