Two months after taking effect, the so-called Cannabis 2.0 initiative in Canada kicked into gear last week as derivative products finally started landing on store shelves. So the cannabis industry is winding 2019 down on a positive note. This is sorely needed after the many negative developments that hammered marijuana stocks in the second half of the year.
The debut of derivatives isn't the only reason for investors to feel better going into the New Year. Last week, another U.S. state voted to hold a referendum on legalizing recreational use. Of course, this being the cannabis sector, we have to temper the good with a bit of bad, too. Here, then, is a mixed bag of happenings in publicly traded marijuana during the week.
New Jersey, new year, new pot law?
Could it become No. 12?
So far, 11 U.S. states have legalized recreational cannabis. The next domino to fall may be New Jersey, which last week set up a public vote on the matter.
The state's legislature passed a measure to allow its citizens to vote on an amendment to the New Jersey constitution that would allow the sale and consumption of recreational weed. Both chambers of the state's legislature -- the senate and the assembly -- voted strongly in favor of the measure, which is to be added to the ballot for next November's federal and state elections.
New Jersey's path toward adult-use legalization has so far been a tortuous one, with previous attempts at doing so with a traditional legislative bill falling short.
It's likely the referendum will get a majority of yes votes, given the widespread support in New Jersey for this form of legalization. Although we won't, of course, be able to gauge a liberalized New Jersey's effects on marijuana stocks initially, the fact that yet another state could go "green" is certainly an encouraging indicator of a very beneficial trend for the industry.
That is, if the industry can hold on for that long. Recent quarterly results from the top cannabis stocks lately have ranged from slightly tolerable to nearly disastrous. Last week, certainly toward the latter end of the scale, we were provided HEXO's (NYSE:HEXO) Q1 2020 figures.
The company's net revenue declined on a quarter-over-quarter basis, which is the opposite of what investors expect to see in pot stocks these days. It fell to $14.5 million Canadian, down from the CA$15.4 million of the previous quarter. It was also more than CA$1 million below the average analyst estimate. (All figures regarding HEXO are in Canadian dollars.)
One culprit was selling prices, since the gross revenue per gram equivalent in the crucial adult-use (i.e., recreational) category dropped by 8% quarter over quarter to land at CA$4.35. Saving the company from a steeper fall was the Up product line, which commands higher prices as a luxury brand.
As you can probably guess by now, HEXO was not profitable in Q1. In fact, similar to net revenue, its net loss of CA$62.4 million was worse than Q4 of fiscal 2019's CA$56.7 million.
Going by this performance, HEXO just doesn't seem to be headed in the right direction by any measure. I think there are other pot stocks more worthy of investor consideration.
Zero hour for Aurora Cannabis
As far as I'm aware, no investment bank has "screaming, immediate buy" as the lowest tier in its stock recommendation system. If GLJ Research did, the investment bank's first note on Aurora Cannabis (NYSE:ACB) would feature those words in bold on the first page.
GLJ initiated coverage of the stock with its more conventional sell rating, but it put a big, fat goose egg on its two-year target price. For a stock -- well, for any good or service, really -- a $0 price target means someone considers it worthless.
This was definitely an attention-grabbing way to open coverage on a stock. GLJ analyst Gordon Johnson thinks Aurora is facing too many challenges, from a worryingly growing pile of debt to serious oversupply issues in Canada that are driving down selling prices.
All of this is accurate. On top of that, recent moves cast serious doubts on management's ability. Earlier this month, the German government provisionally pulled Aurora's license to sell medical cannabis in that country, apparently over the lack of a permit to do so. We don't have all the details about how this transpired, but doing business anywhere in the world without proper licensing is a rookie mistake that no professional should make.
I don't quite buy that Aurora's ultimate value is zero, but lately it's had an awful lot of stumbles -- particularly in the international segment that's supposed to be one of its strengths. So I'm not that confident in its ability to survive this challenging time for even the savviest cannabis operators. Perhaps the stock is best avoided for now.