Cannabis investors brace for writedowns in Q2

Cannabis investors banking on profitability in the second half of the year may have another thing coming: More losses at best, and maybe a surprise stack of writedowns.

Although pot stocks have enjoyed a heady start in 2019 due to global marijuana legalization efforts and the burgeoning use of CBD as a wellness product, backers are starting to judge their investments by profitability instead of hype, and patience is wearing thin. Of the five largest Canadian pot companies, only Cronos Group Inc. is expected to report adjusted net income by the final quarter of the year, according to Bloomberg data.

Instead of profit, writedowns related to unfinished inventory may be in the offing for some Canadian companies. That has some investors voting with their feet, moving out of Canada and into the U.S., where the marijuana companies are generally performing better despite a patchwork of stateby-state regulations.

“It’s symbolic that the Canadian guys have really not been able to deliver on some of their expectations and the American companies have,” said Greg Taylor, chief investment officer at Purpose Investments Inc. and manager of the Purpose Marijuana Opportunities Fund.

Until recently cannabis companies could get away with losing large sums of money as long as they said the right things about their future growth prospects. But the abrupt firing last week of Bruce Linton, co-chief executive of Canopy Growth Corp., indicates that things have changed.

This year could also see a rise in the amount of litigation related to “loose corporate governance” at pot companies, said Morgan Paxhia, co-founder of cannabis hedge fund Poseidon Asset Management LLC.

It’s not all bad news. The second half of the year will involve a few catalysts for Canadian pot companies, including the addition of up to 50 more stores in Ontario and the legalization of edibles and vapes. However, analysts say the impact of these changes won’t be felt in a meaningful way until 2020.

That’s one of the reasons Taylor of Purpose Investments is making a play outside of Canada.

“We’ve moved our portfolio more to the U.S.,” he said. “They’ve been coming at it more as operators and they’re putting up much better numbers.”

Bloomberg