What do you get when a still-nascent industry that's been experiencing growing pains encounters the quickest descent into bear market territory in history for the stock market? The answer is an absolute rout for cannabis stocks.
To be fair, no industry has been immune to the concerns created by coronavirus disease 2019 or the subsequent haircut all of the major U.S. indexes have endured. But the marijuana industry has been particularly vulnerable for a variety of reasons.
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This bear market comes at a terrible time for the pot industry
For starters, Canada has been contending with supply problems since day one of legalization, all the way back on Oct. 17, 2018. Regulatory agency Health Canada was particularly slow in approving cultivation and licensing applications for pot growers, and it also wound up delaying the launch of high-margin derivatives (e.g., edibles, infused beverages, vapes, topicals, and concentrates) by two months.
Additionally, provincial regulators haven't exactly been helpful. Until the end of 2019, Canada's most-populous province, Ontario, had been working with a lottery system to assign licenses to dispensaries. This resulted in a meager 24 retail stores being open as of Oct. 17, 2019, the one-year anniversary of cannabis product sales commencing. For context, this is a province of 14.5 million people that could reasonably house 1,000 dispensaries.
In the United States, taxation has been the real threat to legal-channel sales growth. In states like California, consumers are being hit with already high state and local taxes, along with a 15% excise tax and a wholesale tax. Inclusive of other costs that may not be as visible, such as quality control testing, it's not inconceivable that Californians are paying an extra 50% on legal pot products. This makes it virtually impossible to compete against black-market producers.
Lastly, we're seeing financing concerns throughout North America. In the U.S., where marijuana remains a federally illegal substance, banks and credit unions continue to worry about the prospect of financial or criminal penalties for aiding pot companies. Meanwhile, in Canada, financial institutions have become leery about lending to cannabis companies given the rash of regulatory problems the industry has dealt with since sales began 17 months ago.
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A number of popular marijuana stocks may soon be delisted
For cannabis stocks, their growing pains being compounded with a very fearful stock market has proved to be the perfect storm. Now, with valuations severely depressed, the clock has started on what could be a mass-delisting for cannabis stocks trading on the New York Stock Exchange (NYSE) or Nasdaq.
As a reminder, the NYSE and Nasdaq require publicly traded companies listed on their exchanges to maintain a minimum $1 share. If a company's share price dips below $1 for a period of 30 days, it receives a delisting notice. Though these delisting notices can be appealed and extensions often granted, it's not a good look for the pot industry.
Even following the stock market's best single-day performance since 2008 on Friday, March 13, four marijuana stocks on major U.S. exchanges currently sit well below the $1 mark:
- Aurora Cannabis (ACB 3.55%): $0.77
- HEXO (HEXO +0.00%): $0.78
- CannTrust Holdings (CTST +0.00%): $0.48
- Sundial Growers (SNDL 2.88%): $0.74
CannTrust's fall from grace makes total sense following the admission that it had grown marijuana illegally in five unlicensed rooms at its flagship Niagara facility for a period of six months. CannTrust's cultivation and sales licenses have been suspended since September, and the company has already received a delisting notice from the NYSE.
As for Aurora Cannabis, HEXO, and Sundial, their declines have been real eye-openers. Aurora Cannabis has halted construction of two of its largest cultivation farms, laid off 500 workers, and has reworked its debt covenants. Likewise, HEXO has reduced about a third of its peak production capacity and laid off 200 workers from a variety of departments. As for Sundial, it recently saw its CEO depart and has been reeling from the possibility of facing lawsuits.
None of these four companies looks as if it has the tools to turn things around anytime soon. While a reverse split does remain an option and it is possible they reclaim the $1 minimum share price mark, there's a growing likelihood that 2020 will be remembered as the marijuana stock mass exodus (via delisting) from major U.S. exchanges.
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But wait -- there's more
Of course, these aren't the only four marijuana stocks that have to be worried about delisting.
For example, OrganiGram Holdings (OGI 1.09%) ended the week at only $1.64, and Aphria crossed the ticker tape at $2.25 per share. Both are Canadian growers exposed to the same growing pains as the four pot stocks facing possible delisting -- but OrganiGram just happens to be the best-performer of the bunch, at least based on income statements.
To date, OrganiGram is the only Canadian licensed producer that's been able to generate a no-nonsense quarterly operating profit. During the third quarter, OrganiGram's net sales, less its cost of goods sold and operating expenses, resulted in an operating profit of $1.2 million Canadian. This isn't exactly a profit to write home about, but it's the only pot stock that hasn't leaned on fair-value adjustments or other one-time benefits to generate a quarterly profit.
OrganiGram also boasts a number of other competitive advantages. It's one of a small number of licensed producers that has a supply agreement with every Canadian province, and its three-tiered growing system at its Moncton, New Brunswick, campus should lead to yields per square foot that more than double the industry average.
And yet, it may also be unable to avoid delisting if fear builds in the stock market and growing pains persist for the pot industry.
Earlier this year, I made a prediction that more marijuana stocks would be delisted from a major exchange than uplist to a major exchange. As of now, this prognostication looks as if it'll be correct.
