Heading into 2019, marijuana stocks looked to be set up for success. Canada had recently legalized recreational marijuana, derivative pot products were set to hit dispensary shelves later in the year, and legalization momentum in the U.S. seemingly couldn't be stopped. The table appeared set for the green rush to produce "the green" by year-end. However, things didn't go as planned.
To our north, supply issues have remained persistent since day one of legalization in October 2018, with Ontario issuing far too few licenses and Health Canada struggling mightily to work through an enormous backlog of cultivation and sales license applications. Health Canada also delayed the launch of derivatives, pushing any chance of profitability for Canadian pot stocks out even further.
Meanwhile, marijuana stocks in the U.S. have been clobbered by high tax rates in select states, the ability of jurisdictions to deny retailers a presence, and a resilient black market. In California, for instance, legal weed sales have just about been stagnant over the past two years.
As the near-term outlook for cannabis stocks has worsened, Wall Street's ratings have also soured. Once an industry filled with buy and speculative buy ratings, pot stocks are now a minefield of hold and sell ratings.
This was Wall Street's most-hated cannabis stock in 2019
For much of 2019, Cronos Group (CRON -0.99%) proved to be Wall Street's most-hated pot stock. At one time last year, Cronos had four Wall Street ratings that were the equivalent of a sell.
On one hand, Cronos garnered a lot of attention after snagging a $1.8 billion equity investment from Altria Group, which closed in March. It had less than $25 million in cash and cash equivalents on its balance sheet prior to the closing of this deal, meaning that Cronos essentially put any sort of cash concerns in the rearview mirror by completing this equity investment. Since closing its deal, Cronos has made one notable acquisition -- a $300 million deal to buy Redwood Holdings, the owner of the Lord Jones brand of CBD-infused beauty products.
However, Cronos' stock more than doubled in a span of two months between December 2018 and February 2019 and it didn't sit well with Wall Street -- especially considering the supply issues Canada was contending with. Noting that Cronos was significantly behind its peers in the production and sales departments, most Wall Street firms tempered their expectations for the company or flat-out rated it as a sell.
But Cronos Group shareholders will be happy to know that their company is no longer the most hated on Wall Street. That title now belongs to Aurora Cannabis (ACB -1.94%), which has accrued three sell ratings and a price target of $0 from one off-Wall Street analyst.
Here's why Aurora Cannabis is now Wall Street's least-liked pot stock
What you might find most interesting about Aurora is the incredible bifurcation in thinking between Wall Street and retail investors. As noted, there's not a marijuana stock out there with more sell ratings than Aurora Cannabis. Yet there's also not a stock more millennial investors own on online investing app Robinhood than Aurora Cannabis.
The biggest issue Wall Street has taken is with the company's balance sheet. Despite having access to $400 million in at-the-market offerings (i.e., common stock issuances or convertible debt offerings), as well as $360 million Canadian in credit lines from the Bank of Montreal, Aurora's overzealous expansion has left it with insufficient cash to meet its existing debt obligations, as well as ongoing expansion costs.
Gordon Johnson, the aforementioned off-Wall Street analyst at GLJ Research, placed a $0 price target on Aurora last month, noting that he believes the company is worthless and won't be able to meet its debt obligations by as soon as July.
There are certainly apparent signs that Aurora's balance sheet isn't in the best of health. For example, Aurora announced that it was completely halting construction at its 1.62 million square-foot Aurora Sun grow facility in Alberta and its 1 million square-foot Aurora Nordic 2 cultivation farm in Denmark. Only 238,000 square feet of growing space will be utilized in the interim from Aurora Sun.
The company is also putting its Exeter greenhouse up for sale, with a CA$17 million asking price. Exeter was acquired in the CA$2.64 billion purchase of MedReleaf, and its eventual 105,000 kilos of peak annual output was expected to provide the bulk of MedReleaf's production. Assuming this sale goes through, and including Aurora's production halt at two of its core facilities, the company's peak production has declined from north of 625,000 kilos to around 225,000 kilos. That's a massive cut.
Wall Street is overlooking another big concern
Unfortunately, Wall Street seems to be overlooking another unsightly figure on the company's balance sheet: its goodwill.
Aurora Cannabis ended its most recent quarter with CA$3.17 billion ($2.43 billion) in goodwill. For context, the company's market cap as of this past weekend was just $1.76 billion. What this figure tells investors is that Aurora Cannabis (and really the entire industry) did a poor job of evaluating and valuing its acquisitions.
As pointed out earlier, the MedReleaf deal was made for CA$2.64 billion. But Aurora never wound up developing the 1 million square-foot Exeter greenhouse or the acreage that surrounded Exeter. This pretty much means that, assuming Aurora gets is CA$17 million asking price, it'll have spent about CA$2.62 billion (net) to acquire the Markham and Bradford cultivation farms, which are capable of 35,000 kilos of combined peak output, and MedReleaf's portfolio of products. By comparison, there are a number of premium and ultra-premium cannabis growers with market caps well under $200 million right now that could yield up to 50,000 kilos per year.
There's almost no doubt in my mind that Aurora Cannabis has no chance of recouping anywhere close to its CA$3.17 billion in goodwill, which in all likelihood would lead to a writedown that may surpass its market cap.
While I'm not sure if I share the extreme pessimism of Gordon Johnson, I'm in agreement with the Wall Street sell-side analysts that Aurora should be avoided at all costs by investors.