On Average, These 8 Cannabis Stocks Are Down 75% Year-to-Date, One Company Dropped 97% This Year Alone
Investors Would be Wise to Steer Clear of These Risky Pot Stocks
Despite the downturn in 2019, the cannabis industry has a bright future ahead of it. As one of the most popular and least harmful drugs in the world, cannabis has a good chance of joining tobacco and alcohol as a global product that generates tens of billions in revenue each year. The challenge for investors looking to capitalize on the burgeoning industry is deciding which companies to invest in and which to avoid.
This article will focus on the latter by detailing 8 companies that investors should steer clear of.
- YTD Return: -77%
What was once a very promising large-scale Canadian licensed producer (LP) has been reduced to a shell of its former self. Unlike most other cannabis companies, who have been victims of a bearish market, CannTrust’s fall from grace was self-inflicted. The company decided to skirt Health Canada regulations and grow cannabis in unlicensed facilities. After a whistleblower informed Health Canada of the violations, CannTrust’s cannabis sales and cultivation licenses were suspended. While there is a possibility of the license being reinstated, the company was forced to destroy nearly $80 million worth of illegally grown product. Should the license be reinstated, the company might be an intriguing rebound or takeover play, but until then, investors should stay away.
- YTD Return: -52%
Once billed as the “Amazon of Pot”, Namaste at one time looked poised to be the largest online purveyor of cannabis accessories. Now, the company is more well-known for an ill-conceived investor pledge party that did considerable damage to its business and forced companies such as Tilray (NASDAQ: TLRY) to cut business ties altogether. Namaste has undergone extensive management changes and has seen a drop in revenues over the last year. The company has gone from selling cannabis accessories to also selling products that contain cannabis, signalling a change in business strategy. Management claims to still be ramping up this new business segment as a reason for the revenue decline, but the future of the company is murky at best. There are better companies out there for investors looking for growth.
- YTD Return: -62%
While the company has one of the most recognized dispensary chains in the country, company executives have been grossly irresponsible with their spending. MedMen, the self-proclaimed “Apple Store of Weed” made headlines earlier this year when it was revealed that the company was paying its executives exorbitant amounts of money while also losing tens of millions of dollars. The company slashed executive compensation shortly after the public realized what was going on, but continues to lose large sums of money. MedMen’s most recent earnings release shows a $277 million loss for the fiscal year 2019, compared to $130 million in revenues over the same period. Although revenues are growing nicely, management has shown no ability or wiliness to focus on controlling costs. As of June 29, 2019, MedMen had only $34 million of cash in the bank and is currently burning $90 million per quarter on operations and facility construction. The company will need to raise additional capital soon if it wants to live to see 2020. Investors would be wise to avoid MedMen until the company can demonstrate a certain amount of financial discipline.
- YTD Return: -81%
A textbook case of a failing company keeping the lights on through shareholder dilution, Isodiol’s financial documents are littered with red flags. Total revenues grew modestly from 2018 to 2019, but gross margins plummeted and they managed to produce less gross profits in 2019 than in 2018. This is a sign that the company may be sacrificing margins in one area to produce revenues in another. The operational shortcomings are made worse by the fact that the company has over 9 times as many shares outstanding today as it did in 2017. This massive shareholder dilution has not resulted in positive financial performance for the company. With more capital raises via share issuance sure to come, investors should think twice before betting on Isodiol.
- YTD Return: -90%
This company is a prime example of what can go wrong when people who don’t understand how to run a farm decide to take up cannabis production. Crop Corp has the unfortunate distinction of being the lone cannabis company to come under attack by a herd of wild antelope. The company announced in September that they had lost 8 out of 10 pivots at their Nevada farm to a combination of invasive weeds and said antelope. While the company has other assets, the Nevada disaster shows that management is not running the tightest of ships or doing the due diligence necessary to establish a productive growing operation. With much better operators to park their money in, investors should steer clear of this one.
- YTD Return: -54%
Terra Tech was an early mover in the industry, operating medical dispensaries in Nevada and California before recreational legalization swept the nation. Such an early lead should have allowed the company to become an industry leader, but its revenues have stalled over the last year and fell between 2017 and 2018. The company has shown little inclination in expanding into other states and has been selling off properties in its core markets to raise funds. Most recently, the company unloaded a dispensary in Reno, Nevada for $15 million. Without a clear path to growth, investors have little reason to put money into Terra Tech.
- YTD Return: -87%
In the race to fill the demand created by Canadian adult-use legalization, many companies decided to buy existing facilities and heavily modify them for cannabis production. Unfortunately, these retrofitted facilities typically come with problems of their own, usually involving HVAC and plumbing. FSD Pharma learned this lesson the hard way when they purchased a former Kraft food production facility in Cobourg, Ontario and set out to turn it into one of the largest cannabis growing facilities in the world. The company encountered numerous issues with the facility, resulting in its financing partner Auxly Cannabis (TSXV: XLY) (OTCQX: CBWTF) terminating the joint venture partnership. Despite all that, the biggest red flag for the company is the recent ‘HUGE’ reverse stock split, which saw shares consolidated on a whopping 1 for 201 basis. FSD Pharma is hanging on by a thread and might not make it past 2020.
- YTD Return: -97%
Earlier this year Zenabis Global was trading for $6 per share and things were looking good for the Canadian cannabis producer. Shares of Zenabis, along with the rest of the cannabis sector took a hit when the market rolled over this spring but investors chalked it up to normal market fluctuations. The situation took a turn for the worst in late October when Zenabis announced it needed to raise capital again. The company, desperate for money conducted a rights offering at an astonishing $0.15 per share or 70% below the market price at the time. As expected, there was a mass exodus from ZENA stock as investors pulled their funds from the crumbling company. The icing on the cake came on Monday when it was reported that former Zenabis CEO and current Chief Facilities Officer Kevin Coft dumped 2.6 million ZENA shares just days before the rights offering record date. As of today’s closing price, Zenabis’ TSX listed shares are trading for only $0.19 per share, down 97% on the year. Don’t expect to see a turnaround story here, investors should bypass Zenabis for the time being.
Charts source: Barchart.com
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