For a number of years now, the cannabis industry has made history many times over. In 2018, we witnessed Canada become the first industrialized country to legalize recreational pot sales, and saw the U.S. Food and Drug Administration approve the very first cannabis-derived drug. Meanwhile, in 2019, Illinois became the first state to legalize the consumption and sale of adult-use weed entirely at the legislative level.
This year, we’re liable to see even more history made. For instance, by no later than the end of April, Mexico’s lawmakers are expected to pass legislation that would establish a retail market for recreational cannabis. We’ll also see South Dakota become the first state to vote on medical and adult-use weed in the same election this coming November.
However, 2020 will also be a year filled with unwanted trends for marijuana stock investors. Here are three pot industry trends that investors should be prepared to contend with throughout the year.
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Delisting from a major U.S. exchange
First of all, investors may have to watch a handful of marijuana stocks get delisted from major U.S. exchanges.
Over the previous three years, more than a dozen cannabis stocks either uplisted or went the initial public offering route on the New York Stock Exchange (NYSE) or Nasdaq. Being listed on either of these major exchanges means added visibility, improved volume-based liquidity, and the likelihood of increased coverage and/or investment from Wall Street. You could also say it’s a big step in the maturation process of marijuana stocks.
But in 2020, a couple of pot stocks that have moved from the over-the-counter exchange to either the NYSE or Nasdaq could get the boot.
Take CannTrust Holdings (NYSE:CTST), for example. CannTrust was found to have illegally grown cannabis in five unlicensed rooms at its flagship Niagara property for a period of six months (October 2018 to March 2019). This led regulatory agency Health Canada to suspend the company’s cultivation and sales licenses in September. Although the door has been left open for CannTrust to regain its licenses, the company is unable to sell any product or plant additional crops for the time being.
Meanwhile, CannTrust received a warning from the NYSE in early December for not maintaining the minimum required listing price of $1. Even though CannTrust has since ascended back above $1 per share, it also hasn’t reported its operating results since last May. In other words, it looks like a shoo-in to be shown the door in 2020 — and other popular pot stocks might follow in its footsteps.
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Lawsuits
Next up, marijuana stock investors should prepare for a myriad of lawsuits, regardless of whether or not there’s a lot of substance behind the allegations being made.
You see, cannabis stocks struggled mightily in 2019 to hold investors’ trust, which opens the door for lawyers to attack even the slightest possible sign of wrongdoing going forward. For example, Canopy Growth (NYSE:CGC), the largest marijuana stock in the world by market cap, is having to defend itself against class action lawsuits that allege it made false or misleading claims about its line of softgel and oil products. The lawsuits suggest these claims resulted in Canopy taking a 32.7 million Canadian dollar charge tied to excess returns and inventory in the fiscal second quarter, contributing to the substantive losses in the company’s share price last year.
And Canopy isn’t alone. Quebec-based grower HEXO (NYSE:HEXO) is also facing a myriad of class action lawsuits stemming from the company’s fourth-quarter about-face on its forward guidance. Having previously forecast CA$400 million in forward-year sales, HEXO pulled its sales guidance for the upcoming year and dramatically lowered its fiscal fourth-quarter sales outlook in October. HEXO also announced that it would completely idle its Niagara campus, acquired when it purchased Newstrike Brands, and lay off 200 workers from a variety of departments.
Put simply, investors don’t have a lot of faith in marijuana stocks right now, and law firms are going to look to exploit that when even the slightest bit of potential wrongdoing emerges. Expect lawsuits to be a constant theme for cannabis stocks in 2020.
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Goodwill writedowns
Lastly, investors should expect writedowns to become a somewhat common theme this year, especially after the mountain of goodwill pot stocks have racked up over the past two years.
Goodwill, or the premium that acquiring companies pay above and beyond tangible assets, is usually common during an acquisition. The goal of an acquiring company is to utilize the purchased company’s assets to completely recoup any goodwill. But for cannabis stocks, this is incredibly unlikely given how grossly overpriced most deals were.
As a perfect example, Aurora Cannabis (NYSE:ACB) wound up buying Ontario’s MedReleaf for CA$2.64 billion in mid-2018. Part of the allure of this deal was the 1-million-square-foot Exeter facility, which would need to be retrofit to grow up to 105,000 kilos of weed per year. Aurora announced just weeks ago that it would be putting Exeter up for sale for just CA$17 million. This means Aurora Cannabis bought MedReleaf for perhaps CA$2.62 billion (net), but will have received only 35,000 kilos of annual output in return from MedReleaf’s Markham and Bradford campuses. That’s a grossly overvalued deal that’s liable to lead Aurora to take a huge writedown.
We’re likely to see a writedown from Aphria (NYSE:APHA), as well. Aphria’s 2018 purchases of Nuuvera and its Latin American assets pumped up its goodwill to nearly CA$670 million. This represents about 28% of its current total assets. What you may not realize is that this figure already includes a CA$50 million writedown tied to its Latin American assets last year, which Wall Street and investors didn’t take too kindly to. Pot stocks like Aphria with more than 20% of their total assets tied up in goodwill should bear a red flag for investors in 2020.