3 Marijuana Stocks That Could Fall 47% (or More), According to Wall Street

After a nearly two-year hiatus, marijuana stocks are again one of the hottest investments on Wall Street. In the U.S., 36 states have waved the green flag on medical marijuana, and 15 of them also allow adult-use consumption and/or the retail sale of recreational weed. Meanwhile, Canada opened its doors to recreational cannabis sales on Oct. 17, 2018…

Following a slow start, monthly pot sales in our neighbor to the north are hitting all-time highs. North America represents a potential $75 billion opportunity for the cannabis industry by the end of this decade.

But not all pot stocks have Wall Street professionals convinced of their success. Three marijuana stocks are forecast to lose at least 47% of their value, as measured by Wall Street’s one-year consensus price targets.

HEXO: Implied downside of 47%

As you’re about to see, Wall Street investment banks aren’t thrilled about Canadian pot stocks. It all begins with Quebec-based HEXO (NYSE:HEXO), which would need to fall by 47% to reach Wall Street’s one-year price target.

I’ll be the first to admit that HEXO fooled me big time. It signed what’s still the largest wholesale agreement to date in 2018 — a 200,000 kilo-in-aggregate agreement with Quebec over five years — and laid out plans to focus on higher-margin derivative production (i.e., edibles, vapes, topicals, concentrates, and infused beverages). On paper, HEXO looked like a winner — but that’s not been the case.

HEXO made a big mistake by acquiring Newstrike Brands in 2019 when it didn’t need added production capacity. It’s also been leaning on value-based dried cannabis flower to create a loyal base of customers. Unfortunately, this value-focused cannabis is crushing its margins and ensuring that HEXO continues to lose money.

Even more concerning is the company’s precarious cash situation. Despite selling its Niagara cultivation facility that it acquired when it bought Newstrike, shuttering some capacity at its flagship Gatineau facility, and laying off hundreds of workers, HEXO continues to burn through its cash on hand — and its costs are still too high. The only effective way to raise capital has been to sell its stock and dilute the daylights out of its shareholders.

These issues make HEXO a pot stock worth avoiding.

Cronos Group: Implied downside of 53%

Another cannabis stock Wall Street dislikes is Ontario-based Cronos Group (NASDAQ:CRON). Based on the closing price of Cronos last weekend, the consensus among analysts is that the company could fall 53% over the next year.

The biggest positive for Cronos is that it’s a cash-rich company. In March 2019, it closed a $1.8 billion equity investment from tobacco behemoth Altria Group — the company behind the premium Marlboro brand of cigarettes in the United States. This deal gave Altria a 45% stake in Cronos, as well as a means to potentially diversify its growth prospects away from tobacco. This allayed Cronos’ cash concerns and gave it an established partner to help with developing and marketing cannabis vape products.

The problem for Cronos Group is that the launch of derivatives in Canada was delayed until mid-December 2019, and it’s been plagued by supply bottlenecks for about a year. With only 40,000 kilos in annual production potential at Peace Naturals, Cronos is banking on derivatives to carry the company. This bet simply hasn’t paid off as of yet, as analysts expect the company to generate only $33.8 million in sales in 2020. That’s a staggeringly low number for a company with a nearly $4 billion market cap.

The other issue for Cronos Group is that…

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