Courtesy of Geoff Parkin for the TSX
With Aurora Cannabis Inc. and Canopy Growth Corp. reporting earnings in the coming days, investors should watch closely for losses due to their investments in other weed companies.
Recreational cannabis legalization began Oct. 17 in Canada, and despite the federal government’s public statements, in the intervening months, the country is grappling with massive supply shortages, according multiple people running companies or working in the sector. Provinces have blamed the licensed cannabis producers for the lack of available product, yet the weed producers have said that the shortage and weak September-quarter earnings are a result of licensing backlogs and provincial buyers placing small orders.
The uncertainty surrounding early returns and supply-chain difficulties have weighed on pot stocks, along with doubts about their outsize valuations.
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Since Oct. 17, ETFMG Alternative Harvest ETF /zigman2/quotes/204332491/composite MJ 0.00% has dropped 11%, Horizons Marijuana Life Sciences Index ETF /zigman2/quotes/208856346/delayed CA:HMMJ +0.57% has fallen 14%. After a more than 600% gain on its stock since going public, Tilray Inc. /zigman2/quotes/209129655/composite TLRY -6.74% dropped about 40%, Canopy Growth /zigman2/quotes/200603886/composite CGC -0.69% /zigman2/quotes/202205609/delayed CA:WEED -0.08% has fallen 9.8%. Unlike many of its rivals, Cronos Group Inc. /zigman2/quotes/206842762/composite CRON -0.79% /zigman2/quotes/202715342/delayed CA:CRON -0.58% has performed well, nearly doubling after it announced that Altria Group Inc. /zigman2/quotes/208895754/composite MO -0.15% had taken a $1.8 billion stake in the company.
The downturn could be a problem for Aurora /zigman2/quotes/210559470/composite ACB +0.50% , /zigman2/quotes/203734337/delayed CA:ACB +0.73% especially, which has said it expects sales of C$50 to C$55 million ($37.6 million to $41.4 million) and reports Monday after the opening bell. While Aurora’s portfolio of pot stocks generated large profit in September-quarter results, it could report massive losses this time around because of the sector’s descent and its specific holdings.
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Cronos aside, the pot stock drop is going to be a especially serious for Aurora, because one of the company’s largest investments is in Green Organic Dutchman Holdings Ltd. /zigman2/quotes/206870535/delayed CA:TGOD -3.66% /zigman2/quotes/204266798/delayed TGODF -1.57% , which gave up its gains from earlier in the year while losing roughly 40% of its value. In a note published late Thursday, Harvest Moon Cannabis Co. CEO Robert Doxtator wrote that he estimates Aurora’s portfolio losses at C$425 million for the December quarter.
But the losses will be “on paper” losses and don’t directly affect Aurora — and others’ — ability to produce and sell pot.
Analysts polled by FactSet on average project losses of C$0.6 cents a share on sales of C$51.8 million for Aurora. Note there are only two analysts contributing those estimates, which can make the consensus unreliable. Overall, six analysts cover Aurora with an average target price of C$12.09 a share, which represents a 21% upside from Thursday’s closing price. Four have a buy rating, one rates it a hold and one analyst has a sell rating.
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Canopy Growth, the world’s largest pot company by market value, reports Thursday after the close. Canopy’s profits may also suffer from the overall sector decline, since it holds a substantial portfolio of public companies, as does its publicly traded venture-capital arm, Canopy Rivers Inc. /zigman2/quotes/214109402/delayed CA:RIV 0.00% /zigman2/quotes/201002551/delayed CNPOF +1.84%
Analysts expect Canopy Growth to report losses of C$0.17 a share on sales of C$84.7 million, according to FactSet. Ten analysts cover the name, nine of which have a buy rating; one rates Canopy a sell. The average price target is C$70.70, which is a 17% upside from Thursday’s closing price.
The considerably smaller Supreme Cannabis Co. Inc. /zigman2/quotes/209645734/delayed CA:FIRE +4.26% /zigman2/quotes/203819708/delayed SPRWF +4.40% will report Tuesday before the open. Tilray and Cronos have not announced their earnings dates.
Aphria Inc. /zigman2/quotes/207425803/composite APHA +8.84% /zigman2/quotes/205566616/delayed CA:APHA +8.92% , which is the target of a hostile takeover bid, and Organigram Holdings Inc. CA:OGI -0.44% reported results in January.