There's no sugarcoating it -- marijuana stocks had an awful 2019. A combination of persistent supply issues throughout much of Canada, high tax rates in a number of key U.S. markets, and a resilient black market presence made life very difficult for cannabis stocks last year, with quite a few ending 2019 at or near multiyear lows.
Interestingly, though, asset managers didn't flee pot stocks during the fourth quarter. Rather, data found on Form 13F aggregator website WhaleWisdom.com shows that a majority of cannabis stocks listed on either the Nasdaq or New York Stock Exchange (NYSE) saw their total number of shares held by money management firms with at least $100 million in assets under management rise in the fourth quarter.
Of course, there were a few exceptions.
The following three cannabis stocks all saw their ownership among big-time money managers fall during Q4.
In maybe the least surprising move of the entire fourth quarter, money managers stepped away from embattled pot stock CannTrust Holdings (CNTTQ -80.00%) and reduced their aggregate ownership by almost 6.1 million shares, or 18.1%, from the sequential third quarter.
For those of you who may not recall, CannTrust announced in July that it had been illegally growing marijuana in five unlicensed rooms at its flagship Niagara facility for a period of six months (October 2018-March 2019). This admission wound up leading Health Canada to suspend the company's cultivation and sales licenses in September. CannTrust also terminated its now-former CEO Peter Aceto with cause, and has (at least temporarily) laid off 140 workers given that no planting or sales activity is ongoing.
Recently, CannTrust announced that it had applied for the reinstatement of its cultivation and sales licenses at Niagara, and plans to do the same for its much smaller Vaughan facility in the second quarter of 2020. CannTrust has certainly made strides to demonstrate to regulators that it means business, which includes destroying $58 million in inventory grown and recovered from its illicit operations.
The fact that CannTrust isn't currently generating measurable revenue, has failed to file a quarterly income statement since last May, and has spent considerable time below $1 per share in recent months -- the minimum share price for continued listing on the NYSE is $1 -- are all reasons institutional money managers have fled this stock.
Even though management would prefer it not be called a "marijuana stock," cannabinoid-based drug developer GW Pharmaceuticals (GWPH) saw significant selling by fund managers during the fourth quarter. Aggregate ownership among 13F filers fell by nearly 6.2 million shares, or 24.7% from the sequential quarter.
Perhaps what's most notable is that billionaire money managers were among the largest sellers. Steven Cohen's Point72 Asset Management dumped close to 297,000 shares, with Ken Griffin's broad-based fund Citadel Advisors selling 723,444 shares (about 72% of its total position) in Q4.
Why the negativity? It likely boils down to the Food and Drug Administration's (FDA) acceptance of Zogenix's (ZGNX) new drug application (NDA) filing for Fintepla as a treatment for Dravet syndrome during the fourth quarter. Zogenix's NDA had previously been refused by the FDA for being incomplete, giving GW Pharmaceuticals' lead drug Epidiolex, which is approved to treat Dravet syndrome and Lennox-Gastaut syndrome (LGS), extra time to establish market share dominance in both indications. However, with Zogenix filing its NDA for Dravet syndrome, and recently announcing phase 3 results for LGS, it could be just a matter of time before Epidiolex has some stiff competition.
On the bright side, GW Pharmaceuticals' launch of Epidiolex since Nov. 2018 has been issue-free. The yet-to-be-reported fourth quarter should feature in excess of $100 million in sales (nearly all of which will be from Epidiolex), with the company potentially pushing into profitability by 2021.
It's difficult to say where GW Pharmaceuticals heads next given the looming competition from Zogenix, which could further explain why money managers pared down their stakes in Q4.
Arguably the most surprising cannabis stock that was pared down during the fourth quarter is OrganiGram Holdings (OGI -4.54%). Relative to GW Pharmaceuticals and CannTrust, the selling was very minimal here, with 13F filers reducing their total shares held by only 0.8%. But considering that peers like Aurora Cannabis, Tilray, and HEXO all saw double-digit increases in their respective shares held by 13F filers in Q4 from the sequential quarter, this decline in OrganiGram certainly stands out.
Why money managers would choose to pare down OrganiGram is a mystery to me. The best guess I can offer is that asset managers were concerned with Health Canada pushing back the launch date of high-margin derivatives, such as vapes, edibles, and infused beverages, to mid-December from what was expected to be October. All Canadian pot growers are devoting a lot of attention to derivatives, and perhaps money managers felt that OrganiGram's added emphasis on these higher-margin products merited a bit of caution with this delayed rollout.
Nevertheless, OrganiGram looks to have a number of competitive advantages over its peers. For example, operating only one grow facility in Moncton, New Brunswick, means OrganiGram should have an easier time adjusting its production and operating expenses to match domestic demand. Not to mention, this is the only major grower headquartered in an eastern Atlantic province, which could prove worthwhile given the higher marijuana-use rates of adults in these eastern provinces, relative to Canada's national average..
What's more, OrganiGram's proprietary three-tiered growing system at Moncton should produce 113,000 kilos per year at its peak, yet cover less than 500,000 square feet of cultivation space. This should lead to some of the highest yields per square foot in the entire industry, and therefore some of the best operating margins.
As the only Canadian pot grower to have generated a no-nonsense quarterly operating profit to this point, I believe money managers will regret paring down OrganiGram.