For years, marijuana stocks have taken Wall Street by storm, even though cannabis has long been an illicit drug. The ongoing legalization of marijuana throughout various U.S. states and Canada is expected to help yield anywhere from $50 billion to $200 billion in worldwide weed sales per year by 2030, if Wall Street's forecasts prove accurate. These projections have been responsible for fueling pot stock valuations higher since 2016.
However, 2019 has been a wake-up call for cannabis investors. Similar to all other next-big-thing investments over the past quarter of a century, marijuana's bubble has burst. All fast-growing industries eventually run into "growth hiccups" and need time to mature. For the pot industry, this was the reality check.
Supply issues remain persistent throughout most of Canada this year and are expected to extend well into 2020, so a number of major producers have chosen to reduce their cannabis output. Here are five cannabis stocks that won't come close to hitting their peak production (as once advertised) in 2020.
Even though it wasn't the first marijuana stock to announce production cuts, Aurora Cannabis (NYSE:ACB) is easily the most notable, given the emphasis it's placed on capacity expansion over the past two years. If fully operational, Aurora's 15 facilities could yield close to 700,000 kilos annually, but the company's 2020 fiscal run-rate output will be perhaps half this amount, at the most.
When Aurora reported its fiscal first-quarter operating results, the company announced plans to halt construction of Aurora Nordic 2 in Denmark and Aurora Sun in Alberta to conserve capital. The company will still utilize six grow rooms at Aurora Sun, covering 238,000 square feet of the 1.62 million square feet the campus has projected for cultivation, while Aurora Nordic 2's 1 million square-foot campus will be completely idled. All told, this works out to perhaps 325,000 kilos of forecasted run-rate output that's expected to be idled in 2020.
While it's a necessary move for Aurora Cannabis, given that it doesn't have the enviable cash position of some of its peers, removing output from the (presumed) most efficient grow farms could adversely impact the company's per-gram production costs in the interim.
Quebec-based HEXO (NYSE:HEXO) is another company that plans to reduce its cannabis output in the coming year. Following its acquisition of Newstrike Brands, HEXO's management had been calling for as much as 150,000 kilos of peak annual yield. However, the company is now targeting a more subdued annual run rate of between 90,000 kilos and 100,000 kilos in 2020.
Similar to Aurora, HEXO made the announcement to reduce its output during the company's previous quarterly report (its Q4 2019 results). HEXO advised investors that it would be idling cultivation at the Niagara facility, acquired when it bought Newstrike, as well as halting output at 200,000 square feet of its flagship Gatineau facility. In total, Niagara has peak production capacity of around 42,000 kilos, with HEXO's total production cut amounting to perhaps 50,000 kilos per year.
Following the company's release of its fiscal first-quarter operating results earlier this week, it's very clear these cuts are necessary. Net revenue wound up falling to 14.5 million Canadian dollars from CA$15.4 million in the sequential fourth quarter, with its loss from operations totaling a staggering CA$58.5 million in the period.
The Green Organic Dutchman
Another big-time producer cutting output in 2020 is The Green Organic Dutchman (OTC:TGOD.F). In fact, TGOD (as the company is also known) was the first cannabis stock of the group to announce production cuts.
In October, Green Organic Dutchman provided an operational update that involved a major scaling back of output at its flagship Valleyfield property. Deemed capable of as much as 130,000 kilos per year of yield, TGOD is now looking to utilize just four grow rooms at Valleyfield. These four grow rooms should produce about 10,000 kilos of cannabis in 2020. When combined with the roughly 12,000 kilos of production expected from its Ancaster campus, Green Organic Dutchman is only counting on 20,000 kilos to 22,000 kilos of output next year, which is well off of the 219,000 kilos management has claimed the company is capable of yielding per year.
According to management, these cuts are necessary not only to align production to meet current demand, but also to put TGOD in position to generate an operating profit. Earnings very much matter in the cannabis space now, and management needs to reduce expenses to get in Wall Street's good graces.
Although production cuts will be minimal for popular pot stock Cronos Group (NASDAQ:CRON), the company nevertheless followed suit with its peers and announced something of an operational realignment in its third-quarter report. Here's how Cronos Group put it:
Certain facilities at the Peace Naturals Campus will be partially repurposed from cultivation to provide for additional R&D [research and development] activities, production and manufacturing of derivative products, and will allow for increased vault and warehousing capabilities. In addition, certain facilities at the Peace Naturals Campus will transition to R&D areas focused on new technologies for value-added product manufacturing.
With derivative products beginning to hit Canadian dispensary shelves this week, and these products responsible for substantially higher margins than traditional dried cannabis flower, it makes sense for growers like Cronos to focus on derivatives. It's just noteworthy that Cronos Group's only current source of production, Peace Naturals, a facility capable of 40,000 kilos (at maximum) per year, is being partially repurposed for derivatives research and manufacturing. Cronos is already lagging its peers in the production department, and that gap could widen even more in 2020.
Lastly, there's Ontario's CannTrust Holdings (OTC:CNTTQ), which is in the unique situation of having to halt production due to the not-so-subtle fact that its cultivation and production licenses are suspended by Health Canada.
Back in early July, CannTrust was found to have grown marijuana illegally in five unlicensed rooms for a period of six months (Oct. 2018 to March 2019). In addition to its former CEO Peter Aceto being shown the door for knowing about this illicit cultivation, CannTrust was hit with an official suspension of its sales and cultivation licenses in September. While the company is able to complete the processing of already propagating plants, it won't be able to plant any new crops or sell any product until it regains its licenses.
The company's management team believes it'll have completed a laundry list of requests from Health Canada by the end of the first quarter of 2020, which has included destroying about $58 million worth of illegally grown pot. Until CannTrust regains its licenses, anywhere from 200,000 kilos to 300,000 kilos of combined hydroponic and outdoor peak growing capacity will remain firmly on the sidelines.
Long story short, more "production realignments" could be on the way in Canada.