With two cannabis restructurings announced in one day, it got us thinking.
Is the day of reckoning finally here for all the zombie cannabis company’s floating around?
So in this special edition of the Grizzle Post-Roll, we’re using the power of YCharts to screen for distress in the cannabis industry.
Our Screening Rules
This was a simple but effective screen that saved us hours but cutting out the stocks that are down big, but have a chance to rebound with the overall industry.
To find stocks in trouble we looked at which company’s underperformed the group over the past year, represented by the Horizon marijuana ETF.
The index was down a whopping 75% over the last year so we assume if a company is down 90% they are facing their own set of problems on top of those the industry is dealing with.
Next we looked at the cash runway each company has left.
Only a few months of cash in the bank means many of these stocks will be raising more money soon or if that fails, going bankrupt.
Either outcome will be bad for the stock price.
Yes a few of these company’s will beat the odds and grow cashflow enough to pay the bills but picking the winner is amazingly hard at this point and the chances of failure is high.
Below the chart we’ve highlighted two stocks in particular where the risk to the downside is currently very high.
Cannabis Screen to Look for Future Bankruptcies
|Name||1 Yr Return vs HMMJ||Market Cap (C$MM)||Months of Cash||1 Year Return|
|HMMJ||Horizon Marijuana ETF||-75%|
|INDS.CX||Indus Holdings Inc||-23%||12||3||-98%|
|GGB.CX||Green Growth Brands Inc||-23%||24||1||-98%|
|DB.V||Decibel Cannabis Co Inc||-22%||24||2||-97%|
|ZENA.TO||Zenabis Global Inc||-21%||33||2||-96%|
|MJAR.CX||MJardin Group Inc||-20%||12||4||-95%|
|NUGS||Cannabis Strategic Ventures||-20%||15||0||-95%|
|EMH.V||Emerald Health Therapeutics Inc||-20%||37||1||-95%|
|TGOD.TO||The Green Organic Dutchman Holdings Ltd||-19%||94||2||-94%|
|AGRA.CX||AgraFlora Organics International Inc||-18%||22||10||-93%|
|MMEN.CX||MedMen Enterprises Inc||-18%||79||2||-93%|
|TRTC||Terra Tech Corp||-16%||15||1||-91%|
|EAT.CX||Nutritional High International Inc||-16%||9||10||-91%|
|TRST.TO||CannTrust Holdings Inc||-16%||128||4||-91%|
|HVT.V||Harvest One Cannabis Inc||-16%||19||2||-91%|
|CVSI||CV Sciences Inc||-15%||57||6||-90%|
|VREO.CX||Vireo Health International Inc||-15%||49||4||-90%|
|HARV.CX||Harvest Health & Recreation Inc||-15%||376||5||-90%|
|ACB.TO||Aurora Cannabis Inc||-15%||1,473||5||-90%|
Two Stocks in Trouble
There may be 29 stocks in the table with above-average risk, but two, in particular, caught our eye.
They are both company’s with large market caps and enough daily volume so investors can either sell if they own it or bet that the stock price falls further through options or selling the stock short.
If a stock has no volume or shares cost way too much to borrow and sell short, there is no way to make money on a collapse even if you are 100% right.
The first stock is Aurora Cannabis (NYSE:ACB), one Grizzle readers should know well.
Aurora may be down 90% in the past year but that doesn’t mean the stock is set up for a big rebound.
With only 5 months of cash as of December, Aurora will likely be issuing more shares or secured debt in the near future as they struggle to generate a profit within the next year.
This is a company with no leader and no clear strategy of how it will generate a profit and build a long-lasting brand consumers know and trust.
The second stock on our list is a leader in the U.S. market with assets in more than a dozen states, Harvest Health and Recreation (CNSX:HARV).
Harvest has a much more compelling strategy and growth potential than Aurora, but it still is suffering from deep operating losses and dwindling cash reserves.
As of October 1st 2019, Harvest was down to 5 months of cash left which means they are going to announce a fundraising any day now.
Harvest is set up to win in the fast-growing U.S. cannabis market but investors are in for some short term pain as the company continues to pay for losses with new shares and new debt.
Harvest is in a very dangerous situation and the company’s future is not guaranteed.
Cash is Still King in Cannabis
Even though the industry has been absolutely destroyed in the past 12 months, the cash crunch that contributed to the sell-off isn’t over.
Company’s all over the industry are still starved for cash and until the average stock can turn a profit and survive without one fundraising after another, the bottom is not in.
In our opinion, investors should focus on buying potstocks with cash and a track record of execution, whatever the cost.
Yes stocks with cash are more expensive, but it’s for a reason.
If you blow yourself up chasing what you think is a bargain you won’t be around for your portfolio to benefit from the multi-year explosion in global demand for cannabis.
The future for potstocks is bright, just make sure your still around to see it.
The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Grizzle hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.