3 Cannabis Stocks at High Risk of a Writedown

It’d be fair to say that the past year has not gone as planned for marijuana stocks. Although the first quarter of 2019 started off well, the remaining nine months of the year were a nightmare for investors.

In Canada, supply issues were clearly front and center, with Ontario’s inability to open a sufficient number of dispensaries and Health Canada’s delayed launch of high-margin derivatives adversely impacting pot stocks. Meanwhile, in the U.S., exceptionally high tax rates have made it virtually impossible for licensed producers to compete with the black market. With few exceptions, cannabis stocks have disappointed.  Unfortunately, this disappointment could grow in 2020…

Marijuana stock goodwill is soaring, and writedowns are in the offing

You see, the pot industry has a goodwill problem. Goodwill is the amount of premium that one company pays for another in an acquisition above and beyond tangible assets. While goodwill is commonplace in an acquisition, there’s no precedent to valuing companies in the cannabis space. As a result, it looks as if pretty much all completed buyouts in the pot arena were grossly overpriced.

In an ideal world, when one company acquires another, it looks to build out existing infrastructure and monetize any patents to recoup or significantly lessen any goodwill on its balance sheet. But that’s not likely to happen in the cannabis space, with goodwill for some companies representing a substantial percentage of total assets. And if you don’t think goodwill is a big deal, check out what a mammoth writedown did to Kraft Heinz last year.

With this being said, here are three cannabis stocks currently at high risk of an eventual writedown on their goodwill.

Aurora Cannabis

There’s not a marijuana stock with a bigger red flag than Aurora Cannabis (NYSE:ACB), which ended its fiscal first quarter with a whopping 3.17 billion Canadian dollars in goodwill. This represents 57% of the company’s total assets.

Aurora Cannabis has made more than a dozen acquisitions since August 2016, and they’ve pretty much all resulted in goodwill being added to the company’s balance sheet. This includes what I’ve dubbed the “worst marijuana acquisition in history” — the CA$2.64 billion buyout of Ontario’s MedReleaf. Following Aurora’s recent announcement that it was putting the Exeter facility up for sale for CA$17 million (the Exeter greenhouse was acquired in the MedReleaf buyout), it’s become apparent that all Aurora really purchased for CA$2.64 billion was the Bradford and Markham grow farms, capable of 35,000 kilos per year combined.

Aurora’s chances of recouping CA$3.17 billion in goodwill, or anywhere close to this amount, are slim to none, especially with the company cutting its peak annual production by as much as 400,000 kilos via construction project halts and the aforementioned Exeter sale. A significant writedown — one that might be larger than its current market cap — seems inevitable…

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