When the curtain finally closes on 2019, it'll probably go down as the worst year on record for marijuana stocks. After beginning the year with more than a dozen popular pot stocks gaining in excess of 70%, a vast majority wound up losing at least half of their value, if not more, since the end of March.
If there's a light at the end of the tunnel here, it's that the longer-term outlook for the marijuana industry remains unchanged. With tens of billions of dollars being conducted in the black market each year, there's an obvious opportunity to move consumers into legal channels over time.
However, it's just as important to realize that not every cannabis stock is going to come out a winner. With a new decade less than four weeks away, here are three marijuana stocks that investors should consider selling right now.
Canopy Growth (CGC 10.36%), the largest marijuana stock in the world by market cap, has a lot going for it. Canopy arguably has the best-known cannabis brand in Canada (Tweed), is one of just a small number of growers with supply deals in every province, and is likely to be a top-two grower by peak annual output. Unfortunately, the company's income statement and balance sheet are sort of train wrecks, which makes this stock one to jettison.
The positive for Canopy Growth is that it was able to net a $4 billion equity investment from Modelo and Corona beer-maker Constellation Brands, which closed in November 2018. However, as of Canopy's fiscal second quarter, this cash and investment hoard had dropped to $2.06 billion.
Canopy's aggressive international and domestic acquisition strategy, coupled with its free-spending nature, have ballooned losses and nearly reduced its cash pile in half in about a year. That's a problem, considering that Wall Street doesn't foresee any chance of profitability from the company prior to fiscal 2022.
Another pretty big issue with Canopy Growth is its 1.91 billion Canadian dollars ($1.44 billion) in goodwill (i.e., the premium paid for acquisitions above and beyond tangible assets). This goodwill accounts for 23% of total assets and suggests that the company grossly overpaid for the businesses it has acquired. This makes a future writedown increasingly likely.
The point is that Canopy's size and Tweed brand aren't enough to maintain its premium valuation, when losses are probably going to continue for at least two more years and a writedown seems likely.
It's not just Canadian marijuana stocks that are worth selling from your portfolio. If you've been hanging onto shares of vertically integrated multistate-operator MedMen Enterprises (MMNFF 17.07%), throwing in the towel now, even with the stock near or at an all-time low, might still be a smart move, given that it may not have the capacity to survive another two or three years.
MedMen was all the rage when it went public via a reverse takeover in 2018. It ended up announcing the first major acquisition within the U.S. cannabis industry -- of privately held PharmaCann. The October 2018 all-stock deal, valued at $682 million, was designed to double MedMen's presence from six states to 12, as well as bolster its retail-license count. Plus, with sales per square foot in its California locations that rivaled Apple stores, investors figured nothing could go wrong. But (in my best narrator's voice), they did go wrong.
MedMen has been plagued by high tax rates in its home market of California, where the black market and its considerably cheaper weed has been especially resilient. Combatting this illicit presence, as well as expanding into new markets such as Arizona and Florida, has proved costly for the company, with operating losses last year totaling $231.7 million. MedMen, like Canopy, is probably years away from profitability, which is why it recently scrapped its PharmaCann acquisition.
What's more, MedMen worked out up to $280 million in financing from private-equity firm Gotham Green Partners. At the rate MedMen has been burning through cash, I'm unsure if even $280 million will be enough to get this company on track. This has all the hallmarks of a pot stock to sell now and completely avoid.
I know this is going to be highly unpopular, but investors should also seriously consider throwing in the towel on Aurora Cannabis (ACB 1.80%), even though it remains the most-held stock among millennial investors on online investing app Robinhood.
I get it... Aurora has a lot of particulars that investors love. It could easily lead the world in peak annual marijuana output, has a presence in more countries than any other pot stock, and has billionaire activist investor Nelson Peltz working as a strategic advisor. Unfortunately, investing isn't a popularity contest.
One of the bigger problems with Aurora Cannabis is that Canada's supply issues are no easy fix. Health Canada is going to take quite some time to work through its backlog of licensing applications, and Ontario has been exceptionally slow rolling out new licenses for dispensaries. Not only is this seriously constraining sales in Canada, but it's also hurting the company's chances of shipping product to overseas markets. With Health Canada expecting Aurora Cannabis and its peers to satiate domestic demand first before exporting in bulk to foreign markets, fulfilling domestic demand could take years at this rate, rendering its overseas sales channels a moot point.
Aurora's balance sheet also looks to be in worse shape than Canopy Growth. You see, Aurora doesn't have a mountain of cash like Canopy but does have about $2.4 billion in goodwill from more than a dozen acquisitions. There's little question now that Aurora grossly overpaid for these deals and the value of the future writedown could equate to the current market cap of the company. That's scary, and all the more reason to sell Aurora Cannabis before 2020.