Oh, how the mighty have fallen.
As recently as eight months ago, marijuana stock valuations were near an all-time high. There were more than a dozen pot stocks that possessed a market cap north of $1 billion, and during the first quarter of 2019, 14 cannabis stocks rocketed higher by at least 70%. In effect, they could do no wrong, and the industry was backed up by lofty sales projections from Wall Street.
Unfortunately, these projections have proved about as realistic as a $3 bill.
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Cannabis stock profit projections for 2021 get tossed out the window
Throughout the year, we've seen current-year, forward-year, and 2021 sales and profit projections for nearly all North American pot stocks plummet. Now, just a month from turning the page to a new decade, the consensus appears to be that 2021 will be another money-losing year for most brand-name cannabis stocks.
Keeping in mind that there's no legal precedent to adult-use cannabis, leaving Wall Street to guess just as much as retail investors what could happen next, here are the current full-year consensus earnings-per-share loss estimates for a number of brand-name cannabis stocks for fiscal 2021:
- Canopy Growth: $0.87 per share.
- Aurora Cannabis (ACB -4.85%): $0.10 per share.
- HEXO (HEXO): $0.08 per share.
- The Green Organic Dutchman: $0.06 per share.
- MedMen Enterprises (MMNFF): $0.13 per share.
For those pot stocks that do adhere to a reporting schedule that follows the calendar year, such as Tilray and Cronos Group, losses are expected to continue through 2020. In other words, the green rush is not expected to be delivering the green for at least two more years.
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How could things go so wrong, so fast?
Considering marijuana was the hottest investment on Wall Street for years, you might be wondering how conditions within the industry could sour so quickly. The answer really depends on which marijuana market you're talking about.
In Canada, supply has been the biggest issue. However, it's not been from a lack of effort on the part of growers. Even though most cannabis cultivators only began putting the wheels in motion to bolster capacity in early 2018, more than a dozen companies have peak outputs of at least 100,000 kilos per year. The real blame here lies with regulatory red tape.
Marijuana stocks in our neighbor to the north have had to deal with exceptionally long cultivation and sales licensing wait times given that Health Canada has been bogged down by more than 800 total licensing applications. The industry has also been hurt by certain provinces being unable to effectively license physical dispensaries. Ontario, the country's largest province by population, had just two dozen licensed pot shops a full year after adult-use legalization.
But if we're talking about the United States, high tax rates have been the predominant problem. It's already very difficult for legal-channel weed to compete with the black market, but it becomes almost impossible when sales and local taxes, excise taxes, cultivation taxes, and other fees, such as laboratory testing, are being factored into overall per-gram cost, as they are in California.
Legalized U.S. states have also been guilty of sporadically approving retail stores. With municipalities having the right to ban adult-use weed dispensaries -- and more than 80% of California's municipalities choosing to do so -- it's practically rolled out the green carpet for black market producers.
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Marijuana stocks are countering with some pretty drastic measures
In lieu of these ongoing problems throughout North America, a number of pot stocks have prioritized reducing their expenses and boosting their cash positions in the interim. Considering where industrywide growth expectations were as recently as eight months ago, these moves could be considered drastic.
For example, both Aurora Cannabis and HEXO have chosen to significantly cut production in the near-term to account for Canada's serious supply issues. Aurora Cannabis' fiscal first-quarter operating results noted that it would immediately halt construction on Aurora Nordic 2 in Denmark and Aurora Sun in Alberta, with just six grow rooms expected to be operational at Aurora Sun in 2020. This takes 350,000 kilos of combined peak annual output for Aurora and reduces it to probably no more than 20,000 kilos of run-rate output.
As for HEXO, it's decided to idle its Niagara grow farm, which was inherited via the Newstrike Brands acquisition. Niagara is a facility capable of more than 40,000 kilos per year of output. In addition to halting cultivation activity at 200,000 square feet of its flagship Gatineau facility, HEXO now foresees run-rate production of closer to 80,000 kilos in 2020, as opposed to the 150,000-kilo run-rate it had been targeting.
Meanwhile, U.S. marijuana stocks have been busy amending or axing acquisitions. MedMen, which had envisioned doubling the number of states it had a presence in by acquiring privately held multistate operator PharmaCann, announced on Oct. 8 that it would instead abandon the acquisition in its entirety to focus on core markets and its multiple sales channels. MedMen noted in the press release that the deal would have moved it into noncore markets, which no longer made sense. More importantly, it would have require money-losing MedMen to support an even broader expansion plan when its current expansion strategy is already looking dicey, at best.
The point is, pot stock losses may well continue for some time to come as the industry finds its feet. Be mindful of valuations and invest accordingly.
