Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

It May Be Time to Swear Off Canadian Cannabis Companies

By Prosper Junior Bakiny - Nov 27, 2019 at 6:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The marijuana market in Canada has been a hot mess, but is it time to look elsewhere?

In October 2018, Canada became the first industrialized western nation to legalize recreational use of marijuana. This event -- likely still the most important for the marijuana industry to date -- was well received by investors, who saw a golden opportunity to cash in on the projected growth of sales of marijuana products by investing in cannabis stocks.

Unfortunately, once the initial honeymoon phase was over, a slate of issues got in the way of Canadian pot companies, which haven't performed nearly as well as expected. Let's review two of those issues and whether, in light of these developments, it might be worth removing all Canadian pot stocks from your buy list. 

Scandals galore

Some Canadian cannabis companies have been involved in major scandals. For instance, Aphria ( APHA ) got itself in a world of trouble after allegations emerged that the company overpaid for its LATAM Holdings  acquisition in a ploy by some of its executives to enrich themselves. Aphria denied these accusations and even appointed a special committee to investigate them.

The outcome of this ordeal was certainly not pleasant: Not only did then Aphria CEO Vic Neufeld step down, but the company also incurred a 50 million Canadian dollars non-cash impairment charge as a result during the third quarter of its fiscal year 2019. 

Red mapple leaf surrounded by cannabis plants

Image Source: Getty Images.

Elsewhere, e-commerce-focused cannabis company Namaste Technologies ( NXTTF 0.00% ) encountered its own troubles after a report by short-seller Citron Research alleged that the company was a "complete fraud." This report led to Namaste forming a special committee to investigate some of the claims made by Citron Research, and lo and behold, one of them seemed to be right on the money: CEO Sean Dollinger failed to disclose the details of a deal for the sale of Dollinger Enterprises between himself and another Namaste executive. This lack of transparency on Dollinger's part was not tolerated and the executive was fired, but not before the drama dragged down Namaste's share price.

Finally, in what has been the most publicized scandal of them all, CannTrust Holdings ( CNTTQ 0.00% ) landed itself in hot water when Health Canada discovered the company had grown and sold weed in five secret rooms for several months before these rooms received the proper regulatory approvals. Obviously, this is a big no-no, and CannTrust's license was taken away by Health Canada. 

Although all of these scandals were company-specific, they likely played a role in dragging down the entire industry. 

Issues in the Canadian market 

Despite pot becoming legal in Canada, the market has encountered -- and is still dealing with -- a series of problems. Perhaps the most severe issue is the fact that the process to obtain cannabis retail licenses is incredibly slow. This is particularly true in the province of Ontario that, due to its population, is the largest marijuana market in Canada. Here's what Canopy Growth ( CGC -3.53% ) CEO Mark Zekulin said about issues in the Ontario pot market: 

It [the Canadian recreational market] is the first national, federally legal, large-scale market opportunity for the sector to execute upon. And the market opportunity today is simply not living up to expectations and that this risk of oversimplifying the inability of the Ontario government to license retail stores right off the bat has resulted in half of the expected market in Canada simply not existing. Ontario represents 40% of the country's population yet has one retail cannabis store for 600,000 people. When one year into the market, the addressable market is nearly half what is expected, there is going to be meaningful short-term problems.

This is a telling admission, and this problem is at least partly responsible for the poor financial results most high-profile Canadian cannabis companies recently delivered. 

What's next for Canadian pot companies? 

Fortunately, the problem of retail licenses should be fixed soon -- at least in the province of Ontario where the government vowed to issue more retail licenses. Further, there's no doubt that Canopy and its peers are looking forward to the cannabis derivatives market opening in December.

Derivative products, such as vapes, edibles, and cannabis-infused drinks, are set to hit the shelves sometime next month. These products offer higher margins and present a much better opportunity for these companies to perform as well as we originally expected. But given the issues that Canadian pot companies have faced, it might be best to observe from afar until much improved financial results are actually on record. Until this happens, Canadian cannabis companies are best avoided. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Aphria Stock Quote
Aphria
APHA
Canopy Growth Stock Quote
Canopy Growth
CGC
$9.99 (-3.53%) $0.37
Namaste Technologies Stock Quote
Namaste Technologies
NXTTF
$0.07 (0.00%) $0.00
CannTrust Holdings Inc. Stock Quote
CannTrust Holdings Inc.
CNTTQ
$0.01 (0.00%) $0.00

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
640%
 
S&P 500 Returns
139%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/03/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.