Many investors in marijuana stocks are probably breathing a sigh of relief that 2019 is over. The year brought dismal performances for most pot stocks. To put things in perspective, the two leading cannabis-focused exchange-traded funds (ETFs) both plunged by at least 30%.
When ETFs fall that much, it means there are plenty of individual stocks that dropped even more. Three well-known pot stocks that performed especially badly in 2019 were Aurora Cannabis (ACB -2.96%), HEXO (HEXO), and Tilray (TLRY). But are these beaten-down marijuana stocks ready to rebound in 2020?
Image source: Getty Images.
A common denominator
Aurora Cannabis, HEXO, and Tilray performed much worse than other big Canadian cannabis producers last year. Aurora's shares sank close to 60%. HEXO didn't fare much better, with the stock falling more than 50%. Tilray was the biggest loser of the three, with its shares tanking by over 75%.
There was one major common denominator behind all three stocks' horrible results in 2019: too few retail cannabis stores in Canada. This lack of an adequate retail infrastructure wasn't as problematic early in the year; pent-up demand for legal recreational marijuana initially led to big sales jumps for Aurora, HEXO, Tilray, and their peers. Later in the year, though, the retail bottleneck began to impact the volume of products that provinces were ordering for their adult-use recreational cannabis markets.
Ontario presented the biggest challenge of all. It's the most heavily populated province in Canada, home to nearly four out of 10 residents of the country. But by late November, only 24 retail cannabis stores were open in Ontario. That's one store for every 600,000 residents -- not nearly enough to serve the market.
It's not surprising that the management teams at Aurora and HEXO pointed the finger at Ontario when their quarterly updates later in 2019 disappointed investors. Tilray's executives didn't single out the province, although CEO Brendan Kennedy stated on the company's third-quarter conference call in November that "the challenges in the Canadian market are ongoing, with a limited number of retail locations and a supply-demand imbalance."
Company-specific problems
But Ontario wasn't the only reason that Aurora, HEXO, and Tilray stocks plunged in 2019. Each faced company-specific problems as well.
Aurora made the age-old mistake of overpromising and underdelivering with its fiscal 2019 fourth-quarter results. The company provided guidance for its Q4 revenue without having adequate visibility for its ancillary non-cannabis revenue. Its revenue miss ended up being an embarrassment. Aurora's fiscal 2020 Q1 results were even worse, and led to the company cutting its spending on capital projects. In addition, Aurora closed out the year by having its license to sell medical cannabis products in Germany temporarily suspended, causing the company to lose at least six weeks of sales in the key European market.
HEXO also overpromised and underdelivered. CEO Sebastien St-Louis predicted that net revenue would double in Q4 from Q3, but the company didn't come close to achieving that goal. HEXO's CFO departed unexpectedly in October. The company withdrew its fiscal 2020 outlook. And in late December, HEXO added more dilution to the list of reasons why investors soured on the stock.
While Aurora and HEXO at least enjoyed a few months of big gains earlier in the year, Tilray lost its steam quickly in 2019. The company routinely missed Wall Street estimates in its quarterly results. The acquisition of Manitoba Harvest, a maker of hemp-based foods, weighed on Tilray's margins. Probably the biggest issue for Tilray, though, was that it started out the year with a lofty valuation that simply wasn't sustainable.
Ready to rebound in 2020?
The good news for all three of these companies and their peers is that the retail environment in Canada should improve. Ontario is issuing around 20 licenses for new stores each month, beginning in March, following an initial wave of more than 40 new stores.
Another tailwind is that the Cannabis 2.0 derivatives market will ramp up in earnest in 2020. Aurora, HEXO, and Tilray are offering a range of products in this new market that should boost sales significantly in the new year.
My hunch is that these positive factors will spur many investors to jump back on the cannabis bandwagon, leading to solid rebounds for many Canadian marijuana stocks. I suspect that Aurora, HEXO, and Tilray will enjoy nice bounces.
However, the prospect of further dilution is likely to hover like a dark cloud over all three of these stocks in 2020. Unless the companies can demonstrate that they're clearly on a path to profitability, don't be surprised if the rebounds for their stocks fade.
