The world is “going green” at an incredibly fast pace, and investors have taken notice. The rise of the legal cannabis industry has been undeniable, with global sales growing to $12.2 billion in 2018, and worldwide revenue forecast to rise to more than $31 billion by 2022. Ultimately, we could be looking at an industry that rivals soda in terms of annual sales potential.
However, the fast-paced marijuana industry is also full of unknowns. Although a market for cannabis has existed for decades, it’s been illicit, with many of the variables of the black market remaining hidden. Following the legalization of recreational marijuana in Canada this past October and in 10 U.S. states over the last couple of years, a number of “hiccups” have arisen from within the supply chain. These hiccups have given rise to the craziest marijuana statistic you’re going to see.
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There have been how many marijuana stock upgrades?
Since roughly the midpoint of last year, quite a few pot stocks have had coverage initiated by Wall Street, with an assortment of buy, hold, and sell ratings to go around. There’s also been no shortage of downgrades following the initiation of coverage.
Cronos Group (NASDAQ:CRON) has been downgraded on three separate occasions since Feb. 5, 2019, with GMP Securities, BMO Capital, and Canaccord Genuity moving Cronos to the equivalent of a hold, sell, and sell, respectively. Canopy Growth (NYSE:CGC) wasn’t spared, either, with GMP Securities moving the largest pot stock in the world by market cap from a buy to hold on February 19. And last year, following its epic two-month ascent, Tilray logged a downgrade by Northland Securities to the equivalent of hold from buy. All told, there have been about a half-dozen downgrades since Wall Street became active in covering the cannabis industry.
On the flip side — and here’s the aforementioned crazy marijuana statistic — there have only been two upgrades by a major Wall Street firm over the past year. Remember, we’re talking about what’s arguably considered to be the fastest-growing industry on the planet, and it’s only wowed Wall Street enough to incite two measly upgrades since August.
The two upgrades in question? The first came on August 15, 2018, when Canaccord Genuity upgraded Cronos Group from sell to hold. Of course, it would downgrade Cronos back to sell following its abysmal fourth-quarter report in late March.
The other upgrade came just a day later, on August 16, when Canaccord Genuity lifted Canopy Growth from a hold to a speculative buy. Again, while there have been plenty of marijuana stocks initiated at hold or buy, few appear to be giving Wall Street a reason to get more bullish about their prospects.
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Here’s why Wall Street is rightfully skeptical of pot stocks
There are no shortage of reasons behind Wall Street’s cautiously optimistic approach to marijuana stocks. To begin with, there are supply-chain issues galore in Canada. These supply concerns have manifested in three separate ways.
First, there’s an insane backlog of more than 800 applications that Health Canada is contending with, most of which are cultivation licenses. Many of these applications can take from months to more than a year to review and approve. This is leaving potential growers twiddling their thumbs on the sidelines.
Second, there are packaging constraints that are causing a major headache. Health Canada laid out pretty specific guidelines on what growers and retailers need to do in order to get product on dispensary shelves. Packaging needs to be child and tamper resistant, as well as contain certain warnings and labels. Right now, there just isn’t enough compliant packaging in Canada.
Third and finally, it’s going to be a while before growers are operating anywhere near peak capacity. Aurora Cannabis (NYSE:ACB) could be producing as much as 780,000 kilos a year by 2022 but currently has a run rate of a little more than 150,000 kilos. It’s going to take years before Canadian growers are running at full speed, and Wall Street knows it.
We’re also seeing supply-chain bottlenecks in California, the crown jewel of all marijuana markets. Tax revenue for the state in 2018 came in well below expectations as distribution issues, which include the slow approval of retail store licenses in California, curbed growth.
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Marijuana stock income statements haven’t given Wall Street much confidence, either. Although analysts and investors have had something of a heads-up on the industry’s supply-chain issues, they’ve still been blindsided by some stunningly large losses or less-than-stellar returns. Canopy Growth and Aurora Cannabis, for instance, have lost 403 million Canadian dollars and CA$192 million, respectively, so far in fiscal 2019, with Canopy and Aurora a respective nine months and six months into their fiscal years. Then, there’s Cronos, which generated a pitiful CA$5.6 million in sales during its first quarter of Canadian legalization.
Last of all, the constant issuance of new shares to raise cash by most pot stocks (ahem, Aurora Cannabis) has probably given Wall Street reason to contain its optimism. Aurora, which has issued 1 billion shares of common stock over the last 4.5 years, is going to have a very hard time generating a significant per-share profit as a result of its share-based dilution. Further, with a $750 million shelf offering announced last month, this dilution appears far from finished.
As much as investors would like to see Wall Street becoming increasingly bullish on cannabis, pot stocks haven’t given analysts any reason to change their tune.
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