For years, marijuana stocks could no wrong. But that’s not the case any longer. Now that recreational pot is legalized in Canada, promises don’t hold the clout they once did with Wall Street and investors. Rather, investors are looking for rapidly growing sales and an improvement in the bottom lines of all marijuana stocks. In many instances, pot stocks have failed to deliver.
Perhaps, then, it’s no surprise that the best-known weed stocks have lost 30%, 50%, or maybe even more of their value, over the past 6.5 months…
Short sellers — investors who make money when a company’s share price falls — have certainly been happy.
Interestingly, though, short sellers haven’t been adding to their positions in most marijuana stocks. This might signal that a period of peak pessimism has passed for a majority of the industry. However, there are four cannabis stocks that short sellers continue to pile into.
Surprise! The most widely held stock by the 6 million users of online app Robinhood, Aurora Cannabis (NYSE:ACB), continues to be a beacon for pessimists. Between Aug. 29 and Sept. 29, the number of shares held by short sellers rose from 131.6 million to 153 million. For added context, Aurora has around 1 billion shares outstanding.
Pessimism appears to be building around Aurora for a variety of reasons. Part of the problem is that Canada has been facing persistent supply issues since the first day of its adult-use legalization more than a year ago. These problems, which can be tied to specific provinces and regulatory agency Health Canada, aren’t going to be fixed overnight. This means a continuation of dried flower supply concerns, as well as supply worries following the launch of derivatives. And, as you might imagine, less cannabis being sold in dispensaries means weaker-than-expected operating results for Aurora.
This is also a company that’s bet big on foreign markets. No cannabis grower has a larger international presence than Aurora, with representation in 25 countries, including Canada. The problem is that these foreign markets are relatively useless until domestic demand is satisfied, which, as noted, could take a while.
The icing on the cake for short sellers just might be Aurora’s $3.17 billion Canadian in goodwill. It’s become painfully obvious that Aurora Cannabis (and many of its peers) grossly overpaid for its acquisitions, and it’s unlikely that the company will recoup the full value of this goodwill without eventually writing down a portion of it.
Short sellers have also shown no mercy to Quebec-based HEXO (NYSE:HEXO). Over the same August-to-September time period listed previously for Aurora, pessimists increased their short shares held from 28.7 million to 31.7 million.
This pessimistic view has proved prudent, with HEXO dropping a bombshell on Wall Street two weeks ago. The company provided updated fourth-quarter guidance that featured a new sales forecast of CA$14.5 million to CA$16.5 million, representing sequential sales growth of 19% at the midpoint from the previous quarter. The issue is that HEXO had previously called for 100% sequential sales growth in the fiscal fourth quarter. The company also wound up removing its 2020 full-year revenue guidance.
In its update, HEXO singled out three factors that are keeping it from its full potential. First, HEXO cited the slow rollout of physical dispensaries in key markets. Secondly, there’s been a delay in getting derivative pot products to market, which pushed back when these higher-margin items would begin impacting the income statements of marijuana stocks like HEXO. And thirdly, HEXO noted that it’s beginning to face national pricing pressures on marijuana.
Although HEXO is one of the more de-risked cannabis stocks given its large wholesale supply agreement with its home province of Quebec, the scope of these issues cited by the company cannot be ignored by investors, or pessimists…
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