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July 31, 2019, 12:59 p.m. EDT

Cannabis companies are having a horrible summer as scandals mount and stocks slide

Bruce Linton’s shocking ouster at Canopy, CannTrust’s illegal grow and Curaleaf’s FDA warning letter are hurting the nascent sector

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By Ciara Linnane, MarketWatch


MarketWatch photo illustration/iStockphoto, Bloomberg

The cannabis sector has hit a summer slump, weighed down by a series of scandals, regulatory deadlock and a growing sense that the industry is not delivering the gold rush-like returns that some investors were expecting.

The ETFMG Alternative Harvest ETF /zigman2/quotes/204332491/composite MJ -2.24%  has fallen 17% in the last three months, as the major stock benchmarks have stretched to fresh highs. The S&P 500 /zigman2/quotes/210599714/realtime SPX -0.39%  and Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.95%  have gained about 3% in that time frame and hit record levels.

The slump comes after some unsettling events, including a recent crop of weaker-than-expected earnings from the Canadian licensed players, a full nine months into legalized recreational cannabis. The ousting of Bruce Linton from market leader Canopy Growth Corp. /zigman2/quotes/200603886/composite CGC -2.65% /zigman2/quotes/202205609/delayed CA:WEED -2.71% , the scandal involving illegal growing at CannTrust Holdings Inc. /zigman2/quotes/201332942/composite CTST -3.65%   /zigman2/quotes/206800806/delayed CA:TRST -2.81%  and this week’s regulatory crackdown on Curaleaf Holdings Inc.’s CBD products have added to the downdraft.

“All of those hits are hurting momentum,” said Rob Di Pisa, co-chair of the Cannabis Law Group at law firm Cole Schotz. “It’s just been one thing after another.”

This cannabis ETF has fallen sharply while the S&P 500 has gained

The firing of Linton, viewed by many as the face of legal cannabis given his high profile and frequent media appearances, was a shock for many and a sign that the industry’s freewheeling ways may be over. Linton himself acknowledged to MarketWatch that the $4 billion investment that he and co-CEO Mark Zekulin accepted from Corona beer distributor Constellation Brands Inc. /zigman2/quotes/207737284/composite STZ -0.14%  late last year had contributed to their downfall.

Constellation, frustrated by Canopy’s mounting losses, put the pressure on. Chief Executive William Newlands expressed his impatience on his company’s last earnings call.

“While we remain happy with our investment in the cannabis space and its long-term potential, we were not pleased with Canopy’s recent reported year-end results,” Newlands told analysts. “However, we continue to aggressively support Canopy on a more focused long-term strategy to win markets and form factors that matter, while paving a clear path to profitability.”

Read now: One Canopy Growth co-CEO is out, and the other isn’t far behind in major shake-up at world’s largest cannabis company

DiPisa said the move is a signal to the sector that institutional money and an institutional mindset has moved in. “Linton is what cannabis should be,” he said. “Now we’re seeing the big boys and the big dollars want money from their investment, which makes sense, but it feels as if some of the romance and passion is gone.”

See: Marijuana-delivery service Eaze scales back $1 billion ambitions, documents show

The move has not exactly boosted the stock, either. Canopy shares have fallen about 10% since Linton left and are down 25% in the last three months.

Crackdown on CBD

The shenanigans involving unlicensed growing at CannTrust have crushed that stock, which has fallen 74% in the last three months. Health Canada seized more than five metric tons of the company’s cannabis in early July after discovering it was being harvested in unlicensed rooms. The news has gotten even worse since, as the Canadian media have uncovered emails showing top management were aware of the grow and a Danish partner confirmed that some of the illegal weed had been exported, which is a breach of the Canadian Cannabis Act and an indictable offense. (CannTrust fired its CEO Peter Aceto and President Eric Paul resigned late Thursday, as MarketWatch’s Max A. Cherney reported.)

The FDA’s warning letter to U.S. company Curaleaf this week sent another chill across the sector. The FDA cracked down on the company for claiming that its CBD products could treat serious diseases, including Alzheimer’s disease, opioid withdrawal, pain and pet anxiety, among others.

For more, read: Curaleaf shares tumble 8% after FDA sends warning letter over CBD health claims

CBD has been in a regulatory limbo ever since last year’s Farm Bill legalized hemp but not CBD. CBD is a non-intoxicating ingredient in the plant that is widely held to have wellness properties. The FDA views CBD as a drug because it is the main ingredient in the only FDA-approved cannabis-based drug, GW Pharma PLC’s /zigman2/quotes/209686240/composite GWPH -0.85%  Epidiolex, a treatment for severe forms of childhood epilepsy.

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