Pessimism Is Surging With These 3 Pot Stocks

Through the end of the first quarter, cannabis had been the hottest investment on Wall Street. Over the past three-plus years, most pot stocks had risen by a triple-digit or quadruple-digit percentage, with lofty sales expectations fueling this surge in valuations.

However, the past seven-plus months have been nothing short of a…

train wreck for pot stocks. Most brand-name marijuana stocks, whether they’re listed on a major U.S. exchange or the over-the-counter exchange, have been crushed. In many instances, cannabis companies have seen at least half of their market value go up in smoke.

This decline in pot stocks has some folks out looking for a good deal. Meanwhile, short-sellers (investors who make money if stock prices fall) remain vigilant in a handful of cannabis stocks. The following three pot stocks have witnessed a significant surge in shares held short between mid-September and mid-October.

Aurora Cannabis

Alberta-based Aurora Cannabis (NYSE:ACB) may be the most-held stock, according to investment app Robinhood, but it’s been far more popular in recent months with short-sellers. Between mid-September and mid-October, the number of shares held short grew from nearly 133 million to almost 162 million. For context, the company has just a shade over 1 billion shares outstanding.

Why the sudden distaste for what’s been one of the most popular pot stocks? One reason can be attributed to persistent supply issues throughout Canada. Part of these supply issues is being blamed on Health Canada’s inability to quickly review and approve cultivation and sales license applications, resulting in lengthy delays for some growers in getting their products to market. The other aspect is the slow rollout of physical dispensaries in certain provinces (ahem, Ontario). These supply problems are unlikely to ebb anytime soon, as stated by Aurora’s management.

Building off this initial point, Aurora Cannabis has devoted a lot of its time and money to establishing a presence in two dozen countries outside of Canada. The problem is that these foreign markets are unlikely to see much in the way of sales growth until domestic Canadian demand is being met. By management’s own admission, this could be a while, which would mean little in dividends being paid by its lofty overseas investments.

But the big killer might just be the nearly 3.2 billion Canadian dollars in goodwill being lugged around on its balance sheet, through this past June. Aurora’s acquisition-heavy strategy assumed a quick ramp-up of legal weed sales, which hasn’t materialized. As a result, the company looks to have grossly overpaid for most of its acquisitions, and it very well may lead to a big writedown in Aurora’s future. In sum, short-sellers have good cause to remain pessimistic.

Village Farms International

The story is somewhat similar for Village Farms International (NASDAQ:VFF), which has been subjected to the same supply constraints impacting Aurora and other growers throughout Canada. Between mid-September and mid-October, Village Farms’ shares held short rose from 4.4 million to nearly 5.8 million.

However, much of the worry surrounding Village Farms has been built up in recent weeks. The company completed a bought-deal offering for a little more than 3 million shares on Oct. 22 that wound up raising CA$28.8 million. While having a readily available source of capital is important, selling stock winds up diluting existing shareholders.

Maybe more worrisome is the potential spat between joint venture partners. In mid-October, Village Farms announced that it would be receiving a dispute notice from Pure Sunfarms partner Emerald Health Therapeutics (OTC:EMHTF). Without getting too much into the weeds, Emerald Health agreed to buy 40% of the joint venture’s (Pure Sunfarms) production. Apparently, it didn’t exercise its rights to purchase the full 40% of output in the latest quarter, causing Pure Sunfarms to sell product at wholesale pricing, which is lower than the agreed-upon price that Emerald Health would purchase from the joint venture. The spat concerns Emerald Health bridging the gap between this agreed-upon price and the lower wholesale prices.

Despite these concerns, Village Farms International also offers multiple revenue streams, which isn’t something you’ll find with most pot stocks. Aside from cannabis, the company should benefit from planting large amount of hemp in the U.S. — hemp can be processed for its high-margin and in-demand cannabidiol — and has its predictable vegetable-growing operations to lean on.

While I admit to not being a big fan of Village Farms earlier this year, the valuation looks far more attractive now. Betting against this stock could be akin to playing with fire…

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