What a difference even a few months can make when it comes to the cannabis industry.
During the first quarter of 2019, marijuana stocks did what they've been doing for the better part of three-plus years -- printed money for their shareholders. In the first quarter, 14 pot stocks moved higher by at least 70%, and the Horizons Marijuana Life Sciences ETF, the first exchange-traded fund focused on cannabis, gained more than 50%. Pardon the pun, but expectations remained high with Canada having legalized recreational weed in October, and numerous U.S. states pushing toward some form of medical or recreational weed legalization.
However, it's been almost straight downhill since the end of March. In fact, it's almost hard to believe that, at one point in April, more than one dozen marijuana stocks possessed at least a $1 billion market cap. The industry that looked to be ascending to the heavens has been pulled out of the ground by its roots.
Brand-name marijuana stocks have cost investors $40 billion
While I can certainly spout of percentage declines that are likely to open a few eyes, investors have mostly become desensitized to the wild price fluctuations that come with owning pot stocks. A much better way of conveying the pummeling that pot stocks have taken recently is by comparing the market caps of 17 companies that had reached billion-dollar status earlier this year to their market caps as of today. What I'll be using for reference are the market caps of these companies on April 25, and those as of Nov. 19, which represents a nearly seven-month time frame.
Here's how these billion-dollar pot stocks have fared over this period:
- Canopy Growth (NASDAQ:CGC): A decline of $11.31 billion in market cap.
- Aurora Cannabis (NYSE:ACB): $6.78 billion.
- Cronos Group (NASDAQ:CRON): $3.21 billion.
- Tilray: $2.95 billion.
- Curaleaf Holdings: $2.32 billion.
- Acreage Holdings: $2.18 billion.
- Harvest Health & Recreation: $1.94 billion.
- GW Pharmaceuticals: $1.8 billion.
- Green Thumb Industries: $1.26 billion.
- MedMen Enterprises: $1.21 billion.
- Cresco Labs: $1.17 billion.
- HEXO (NYSE:HEXO): $1.04 billion.
- Aphria: $0.85 billion.
- Charlotte's Web: $0.66 billion.
- The Green Organic Dutchman: $0.65 billion.
- OrganiGram Holdings: $0.64 billion.
- Trulieve Cannabis: $0.17 billion.
On a combined basis, this works out to just over $40 billion in paper losses since April 25. Mind you, this market cap data comes a day after most marijuana stocks hit their lowest levels in two or more years. Had I chosen Nov. 18, paper losses would have been even higher.
Furthermore, if I included other brand-name companies that hadn't quite reached $1 billion in market cap, say Emerald Health Therapeutics, Origin House, CV Sciences, and about two dozen other popular pot stocks, paper losses might even begin approaching $45 billion or $50 billion for investors over the past seven months.
Cannabis stocks are cutting production
While there's no doubt that marijuana stocks have the potential to succeed over the long run -- the sheer size of the black market demonstrates how robust demand can be for pot products -- it's become apparent that a number of near-term issues are liable to continue weighing down cannabis stocks in the near term.
For one, it's going to be a while before Canada figures out how to contend with its supply issues. For those who haven't kept abreast on the situation, regulatory agency Health Canada has been slow to approve cultivation and sales license, while certain provinces (ahem, Ontario) have slow-stepped the licensing of physical dispensaries. Both factors have paved the way for the black market to continue thriving.
Perhaps unsurprisingly, some of the biggest losses in Canada have come from the country's largest projected growers by peak output. Aurora Cannabis, which expects to lead all companies in peak output, recently announced that it would be halting construction at both its Aurora Nordic 2 and Aurora Sun grow farms to conserve capital. Instead, it'll operate just six grow rooms out of Aurora Sun covering 238,000 square feet (Aurora Sun is initially designed to be a 1.62-million-square-foot facility). Effectively, this is around a 325,000 kilo annual run-rate reduction for Aurora Cannabis, or about half of its forecasted annual run-rate by the end of its fiscal 2020.
Aurora's not alone, either. HEXO also announced production and job cuts in October. HEXO, which was projected for at least 150,000 kilos of peak output, has chosen to idle its Niagara campus that was acquired with the Newstrike Brands purchase. In total, HEXO is only counting on an annual run-rate of 80,000 kilos for the time being, and is shedding 200 jobs to better align with the current market conditions.
Cash isn't going to save pot stocks anymore
Another pretty notable trend is that cash isn't king when it comes to cannabis stocks. While there are a handful of pot stocks that could use a serious cash infusion (ahem, Aurora Cannabis), those companies that are sitting on a heaping pile of cash haven't been spared from the investing bloodshed. I'm looking at you, Canopy Growth and Cronos Group.
Canopy Growth wound up landing a $4 billion equity investment from Modelo and Corona beer maker Constellation Brands one year ago, which actually marked Constellation's third such investment in the company. When 2019 began, Canopy was sitting on more than $4.9 billion Canadian in cash and cash equivalents. Today, however, this war chest has been whittled down to closer to CA$2.7 billion, with Canopy using its capital to seemingly overpay for acquisitions, as well as to expand its domestic and overseas infrastructure. With Canopy Growth spending more on share-based on compensation than it generated in net sales in the fiscal second quarter, this cash pile could continue to dwindle.
The same could be said for Cronos Group, albeit to a lesser degree. Cronos Group received a $1.8 billion equity investment from Altria Group that closed in mid-March. Cronos did put $225 million of its cash hoard to work by acquiring Redwood Holdings, owner of the Lord Jones cannabidiol-based beauty product brand, during the third quarter for $300 million (the remaining $75 million was paid for with stock). However, Cronos Group keeps losing money on an operating basis, without the aid of one-time benefits and fair-value adjustments. It's also well behind its peers in the production and sales department.
While the bulk of marijuana stock market cap losses are now, thankfully, in the rearview mirror, that doesn't mean a rebound is around the corner. The pot industry has a lot of growing up to do, and that'll probably continue to be reflected in the share prices of marijuana stocks for some time to come.