For years, the marijuana industry was the hottest investment on Wall Street. Investors could practically have thrown a dart at a list of North American licensed producers and doubled their money in a few months, if not generate even more robust gains.
Then April 2019 hit, and reality kicked in.
Over the past 13-plus months, cannabis stocks have been raked over the coals. Regulatory-based supply issues in Canada, high tax rates on legal-channel pot products in key U.S. states, and the inability of many North American pot stocks to access traditional forms of financing have quickly pulled the rug out from beneath this blazing hot industry.
For some investors who got in early, their gains are still pretty substantial, even after a sizable pullback. Meanwhile, other pot stocks investors have been left with pennies on the dollar from their original investment. If you had invested $10,000 exactly three years ago (as of May 11, 2017) into each of the four most popular marijuana stocks -- Canopy Growth (CGC -1.80%), Aurora Cannabis (ACB -2.40%), Cronos Group (CRON -3.75%), and HEXO (HEXO -2.04%) -- and held that investment through May 11, 2020, here's what you'd be left with today.
Canopy Growth: $23,680
For shareholders of the largest cannabis stock in the world by market cap, your long-term investment is still working out quite nicely. Sure, you were up close to 800% in October 2018, but a nearly 137% return in a three-year time span is nothing to sneeze at.
One the biggest tailwinds for Canopy continues to be its close tie-ins with beverage giant Constellation Brands (STZ -1.71%). Between October 2017 and May 2020, Constellation has made four direct or indirect investments into Canopy and currently owns 38.6% of the company's outstanding shares. In other words, Constellation has a very sizable interest in seeing that Canopy Growth succeeds, especially after instilling its former Chief Financial Officer, David Klein, as Canopy's new CEO.
On the flipside, despite having a boatload of cash, Canopy Growth has been burning money at an extraordinary rate. Recently, Klein has spearheaded the closure of multiple greenhouses, and has overseen a few rounds of layoffs in an effort to reduce operating expenses. But even with these measures, Canopy remains a good two years away from having a shot at recurring profitability.
Aurora Cannabis: $3,285
Dumpster fire alert! If investors had bought $10,000 worth of the most popular pot stock exactly three years ago... they'd have only $3,285 left today. It should be noted that Aurora's share price had sunk so low recently that it enacted a 1-for-12 reverse split earlier this week.
At one point in mid-2019, Aurora was expected to be the world's leading marijuana producer. Today, that's not the case. The company's overzealous acquisition strategy has it cutting costs at a rapid rate. It's halted construction on two of its largest projects and is attempting to sell a greenhouse that was expected to produce 105,000 kilos of cannabis per year. Similar to Canopy Growth, Aurora has also been laying off workers in an effort to reduce its expenses.
Another big issue with Aurora is its balance sheet. The company doesn't appear to have nearly enough cash to cover its liabilities over the next 12 months, which has meant ongoing dilution in the form of selling its common stock. In less than six years, Aurora's outstanding share count has ballooned from a reverse-split adjusted 1.33 million to about 109 million. There's also Aurora's $2.41 billion Canadian in goodwill, which I suspect is another big writedown just waiting to happen.
Cronos Group: $29,340
Without question, the top-performing pot stock among the four most popular weed companies is Cronos Group. Though it's pared back peak gains of more than 1,200%, which it achieved in February 2019, a 193% increase in three years' time is a solid return in any industry.
Like Canopy Growth, an equity investment is what's primarily responsible for these big gains. In March 2019, tobacco giant Altria Group (MO -1.92%) closed on a $1.8 billion equity investment in Cronos, giving it a 45% stake. The expectation here being that Altria would help Cronos become a major player in cannabis vapes, while Cronos would utilize this $1.8 billion in cash to expand into new markets and bolster its derivative product line.
However, things haven't exactly worked out as planned. A vape-health scare in the United States, followed months later by supply chain disruptions in China caused by the coronavirus disease 2019 (COVID-19), haven't allowed the Altria-Cronos partnership to blossom. Add this to Cronos' meager production capabilities, and we get a company with a large pile of steadily dwindling cash and very little pot production to speak of.
Finally, long-term-minded investors have taken quite the bath if they chose to buy $10,000 worth of Quebec-based licensed producer HEXO three years ago. Their initial investment has sunk by more than 56% after, at one time, being up by almost 600%.
At this time last year, HEXO looked as if it'd be one of the more de-risked cannabis stocks. It had a 200,000-kilo-in-aggregate wholesale agreement in place over a five-year period with its home province, and was spending big bucks on readying its processing capabilities to take advantage of derivatives, such as vapes, edibles, and beverages, which were set to launch later in 2019. But little has gone right.
Since October, HEXO has permanently shuttered the Niagara grow farm, acquired via the Newstrike Brands buyout, as well as written down a big chunk of that purchase. We've also seen HEXO lay off workers to help lower its operating expenses. But most worrisome, CEO Sebastien St-Louis has said that the company would need 20% market share in Canada just to be profitable. With HEXO's cash running low and the company issuing stock to raise capital, HEXO's ongoing listing on the New York Stock Exchange, as well as its long-term survival, are very much in question.