Marijuana Penny Stocks: Can They Bounce Back from the Current Downturn?

Can Marijuana Penny Stocks Recover From the Current Downturn
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Marijuana Penny Stock Future

It has been a devastating summer for marijuana penny stocks. Across the board, marijuana stocks have taken a beating in the recent downturn, but marijuana penny stocks have been some of the hardest hit. That makes sense, after all: they are smaller and more vulnerable to large market swings due to their size.

But despite these pullbacks, I think that some still hold a lot of potential for big gains, while others are facing much more than just a small downturn.

First, we first have to understand that it’s not all bad. In fact, my favorite marijuana penny stocks—OrganiGram Holdings Inc (NASDAQ:OGI) and Hexo Corp (NYSE:HEXO)—are still up big year-to-date, even if the recent past has been less than ideal.

You can see their progress in the chart below, alongside the horrid performance of CannTrust Holdings Inc (NYSE:CTST).

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Chart courtesy of StockCharts.com

As can be seen in the above chart, 2019 has still been a very strong year for marijuana penny stocks, even with the awful start to the summer they’ve had.

But we can’t exactly say this is unexpected. I’ve been warning for a long while now that a marijuana downturn was in the cards; it was only a matter of when. Now that it has hit, we can expect many of these marijuana penny stocks to weather this storm—incurring painful losses, no doubt, but emerging from the other side stronger for it.

Many, that is to say, except CannTrust Holdings, which finds itself in an altogether different conundrum.

CTST Stock Trouble

While I’m still bullish on both HEXO stock and OGI stock in the long term, CTST stock has lost all my confidence.

To those who have been following my columns lately, I’ve written extensively on CannTrust Holdings’ fall.

A brief recap: an audit from Health Canada found the company’s greenhouse facility in Pelham, Ontario to be non-compliant with certain regulations. (Source: “CannTrust Statement Regarding Health Canada Audit,” CannTrust Holdings Inc, July 8, 2019.)

“The non-compliant rating is based on observations by the regulator regarding the growing of cannabis in five unlicensed rooms and inaccurate information provided to the regulator by CannTrust employees,” wrote CannTrust.

“Growing in unlicensed rooms took place from October 2018 to March 2019 during which time CannTrust had pending applications for these rooms with Health Canada. These rooms were constructed in accordance with regulations and Good Production Practices, and licenses were issued for each of the five rooms in April 2019.  There are 12 rooms in total at the facility.”

(Source: Ibid.)

Health Canada proceeded to place a hold on CannTrust Holdings Inc’s inventory, which includes over 10,000 pounds of dried cannabis.

Over 15,000 pounds were placed on a voluntary hold by the company at the Vaughan, Ontario facility due to the cannabis having originated from these unlicensed rooms.

Health Canada is going to conduct quality checks of product samples over the next 10 to 12 business days. Product shortages are expected to follow, the company said.

But that was a few days ago. Things have only worsened since. There is now the possibility that CannTrust Holdings could lose its license entirely.

In an unannounced inspection, regulators found the company grew pot in unlicensed rooms, provided “false and misleading information” to inspectors and had inadequate record keeping, according to Health Canada spokesperson Tammy Jarbeau. (Source: “CannTrust stock tumbles another 13% on speculation cannabis grower could lose its licence,” Financial Post, July 12, 2019.)

CTST stock has plummeted roughly 50% over the past week as a result of this inspection, and I anticipate that the losses will only continue to mount as the investigation continues.

But things have been bad all around for marijuana penny stocks in June and July.

Chart courtesy of StockCharts.com

While not as cataclysmic as CTST stock, both OGI stock and HEXO stock have been battered of late, each down significantly over the past month.

The main difference, however, is that OrganiGram Holdings and Hexo Corp are simply facing a weak market, while CannTrust is facing a genuine threat to its very business. As you can understand, investors are not going to be particularly keen on CannTrust Holdings in its current state.

And while marijuana stocks often face setbacks before returning back to bullish runs, I simply don’t see this in the cards for CannTrust Holdings.

I’ve made the comparison to Aphria Inc (NYSE:APHA) and I think that it holds. APHA stock fell due to a legal issue and then kept falling for about a year afterwards, even as many other pot stocks saw gains. While it did eventually recover, it took a prolonged period of loss before that recovery took place.

I believe the same thing is in store for CTST stock, and even then, I’m not sold that it can come back from this. Losing its license—if that indeed takes place—would be devastating for the company and hurt numerous quarterly reports, sending its share prices into the doldrums.

I’ve been saying this all week: investors, don’t expect CTST stock to rally anytime soon, or potentially ever.

OGI and HEXO Stock

On the opposite end of the spectrum, we have Hexo Corp and OrganiGram Holdings.

While times have been tough lately for both these marijuana penny stocks, ultimately they have the fundamentals in place to weather this storm and emerge stronger on the other side.

While a pullback is likely in the cards for both companies moving forward, I think that in a year’s time many investors will be happy to have held on.

As for investors who need to lock in profits right now, selling might not be a bad idea (although I’d argue that they would be losing value). But that’s only for investors who would rather see gains right now rather than play the long game.

And of course, there’s no guarantee that these companies will stage a comeback. But I am convinced that they will be better off within 12 months than they are now. They have all the fundamentals in place to ensure a speedy recovery once the market exits the current dip.

Analyst Take

Not all marijuana penny stocks are created equal. While it is generally true that they all suffer more during marijuana stock downturns, the ability to recover is not universal.

Some pot stocks, like OGI and HEXO, are suited to bear these pullbacks and come through stronger when it’s all said and done. Others, like CTST, have much more deep-seated problems that will prove to be difficult for investors to look past.