On a broad scale, the marijuana industry has been mostly unstoppable for years. Canada has become the first industrialized country in the world to legalize recreational cannabis, while 33 U.S. states have given the green light to medical marijuana (11 of which also allow adult-use consumption). These ongoing legalization efforts, and the expectation of organic growth in legalized countries/states, is what’s fueled the march higher in marijuana stocks.
But when examined with a fine-tooth comb, the cannabis industry isn’t without its hiccups. In June, despite a 2% increase in the Horizons Marijuana Life Sciences ETF, the first tradable cannabis ETF, more than 60% of the 60 pot stocks I regularly track declined. And some of the marijuana stocks that declined are especially popular among the investing community.
The following three popular pot stocks all sank by a double-digit percentage in June…
HEXO: Down 17%
Among the most-followed marijuana stocks, maybe none proved to be a bigger disappointment in June than HEXO (NYSEMKT:HEXO), which lost about a sixth of its value. The Quebec-based pot grower’s woes can be traced to two events last month.
First, Wall Street was not pleased with HEXO’s third-quarter operating results, released on June 12. It was no secret prior to this report that supply issues were impacting most of the country, and marijuana stocks that had reported their quarterly operating results before HEXO had shown little, if any, organic growth. Nevertheless, it didn’t absolve HEXO from delivering unimpressive sequential quarterly sales results. Even with a nearly 1,200% increase in year-over-year sales, HEXO’s net cannabis revenue fell 3% from the sequential second quarter, with both medical and recreational sales declining. Furthermore, even with the benefit of fair-value adjustments on biological assets, HEXO’s loss ballooned from the year-ago quarter.
The other concern is that Health Canada laid out the official timeline as to when derivative products (e.g., edibles, infused beverages, topicals, vapes, and so on) will begin hitting dispensary shelves. Although laws regulating derivatives are expected to take effect on Oct. 17, 2019, the one-year anniversary of adult-use legalization in Canada, these products won’t begin to see the light of day in licensed cannabis stores until mid-December, at the earliest. Since HEXO has devoted a significant portion of its infrastructure to extracts, this means another quarter or two without a significant margin and sales boost.
Over the longer run, HEXO does look to have its ducks in a row. But in the interim, the company’s operating results could remain decidedly weak.
Origin House: Down 15%
Another popular pot stock that had a miserable June is cannabis distribution company Origin House (NASDAQOTH:ORHOF), which is in the process of being acquired by Cresco Labs (NASDAQOTH:CRLBF). Origin House shed 15% of its value last month and, like HEXO, has two catalysts to blame for its poor performance.
Despite shareholders overwhelmingly voting in favor of the combination, the first problem Origin House and Cresco Labs encountered was the request for additional information from the U.S. Justice Department. Although this merger doesn’t offer much in the way of overlapping businesses, an antitrust review from the Justice Department could hinder this combination. I personally don’t foresee the Justice Department denying this merger, but it could close later than Wall Street has been expecting.
The second factor that’s dragged down Origin House is weakness in most U.S. dispensary stocks. While most pot stocks fell during the second quarter, few groups were as weak as the vertically integrated U.S. dispensary operators. Since the Cresco Labs buyout is an all-stock deal, this ties Origin House at the hip to Cresco’s performance.
But in spite of recent weakness, this merger holds a promising future. Cresco Labs gaining access to more than 500 California dispensaries via Origin House’s distribution licenses should make it a force to be reckoned with in the Golden State…
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