As recently as last March, marijuana stocks were considered the greatest thing since sliced bread. During the first quarter, pot stocks wound up surging, with more than a dozen ending higher by at least 70%.
But the past 11 months have been highlighted by a precipitous decline in marijuana stock valuations. Canadian supply problems and high tax rates in core legalized U.S. states have wreaked havoc on the industry and caused Wall Street to reevaluate its expectations (and valuations) for cannabis stocks.
The hope has been that the changing of the calendar from 2019 to 2020 would allow the marijuana industry to begin the year with a clean slate, at least in the eyes of investors. But according to short-interest data between Dec. 31, 2019, and Jan. 31, 2020, pessimism still abounds in the cannabis space.
In the case of the following three pot stocks, the number of shares held short by pessimists all increased by a double-digit percentage in January.
Perhaps it's no surprise that one of the most short-sold marijuana stocks is also one of the worst performing in the industry, Aurora Cannabis (ACB -3.62%). Despite its allure with millennial investors on the Robinhood investing app, the number of shares held by short-sellers surged from 171.2 million at the end of December to 191.7 million by the end of January. This works out to more than 16% of the company's total outstanding shares.
While it's impossible to know exactly when this short interest in Aurora skyrocketed in January, it does have all the makings of an excellent downside bet. For example, in early February, Aurora announced a number of corporate updates that signify just how much trouble the company is currently in.
Longtime CEO Terry Booth announced his retirement; Aurora indicated that it had adjusted the covenants tied to its secured debt; and the company announced plans to reduce its selling, general, and administrative (SG&A) expenses to between 40 million Canadian dollars ($30.07 million) and CA$45 million per quarter. For reference, SG&A was CA$99.9 million in Q2 2020. Aurora also wound up providing guidance for its fiscal second quarter, which would include huge writedowns.
On one hand, it's encouraging to see management recognizing and dealing with these problems that have been ignored for too long. On the other hand, Aurora Cannabis remains unprofitable, and its cash balance looks insufficient to cover an estimated CA$373.6 million in liabilities over the next 12 months, and nearly CA$1.3 billion over the next five years. Aurora, for its part, has halted construction on two large cultivation sites and plans to sell another major greenhouse to conserve capital. But the future remains decidedly uncertain for this popular marijuana stock.
Another pot stock that drew the ire of pessimists during January was British Columbia-based Tilray (TLRY). The number of shares held short in Tilray skyrocketed from 7.6 million at the end of December to 10 million a month later.
One possible reason for the increased negativity could be the mid-January surge in Tilray's share price. Over a two-day stretch, the price rose by 40% despite the fact that nothing had materially changed with the company.
Speaking of what's materially important, Tilray's outlook has continued to deteriorate over the past year. Last March, CEO Brendan Kennedy announced that his company would focus future investments on the U.S. and Europe, which was an odd move to make with Canada's adult-use industry commencing sales six months prior. Having to ensure that all of the proper infrastructure is in place in these markets has increased near-term spending and stymied sales. As a result, Wall Street is looking for more than a $1-per-share loss from the company in 2020.
What's more, Tilray's push into the United States via its purchase of Manitoba Harvest may not pan out as planned. The deal was to provide Tilray with access to 16,000 retail doors throughout North America where cannabidiol (CBD) products could be sold. Unfortunately, the Food and Drug Administration's skeptical stance on CBD has substantially brought down growth projections for infused CBD products.
For the time being, this pessimism looks wholly warranted.
Lastly, we've also seen short interest building in embattled pot stock CannTrust Holdings (CNTTQ -16.67%). Between the end of 2019 and the end of January 2020, the number of shares held by short-sellers jumped from 11.5 million to 15 million.
Similar to Tilray, one possible reason for the increase in short interest was a significant rally in CannTrust's share price. Between Dec. 26 and Jan. 17, shares of the company rose by nearly 50%, which is a bit of a head-scratcher given CannTrust's numerous problems.
A more logical reason for pessimism to have built up is the loss of investor trust. As you may be aware, CannTrust announced in July that it had grown marijuana illicitly in five cultivation rooms at its flagship Niagara facility for a period of six months (October 2018 to March 2019). This led regulatory agency Health Canada to suspend the company's sales and cultivation licenses. Although CannTrust recently filed paperwork to reinstate its licenses at Niagara, it's far from a given.
Furthermore, CannTrust's share price is, once again, below $1 a share, and the company hasn't filed a quarterly report with the Securities and Exchange Commission since May 2019. A share price above $1 and regular income-statement filings are both required for continued listing on the New York Stock Exchange. This makes de-listing a very real possibility.
Though I do believe CannTrust can be a bad-news buy, I'm expecting things to get a bit worse before they get better.