There has been a lot of focus on cannabis penny stocks lately. It is because many of them have doubled or tripled in price at points over the past few years. These large moves have mostly been predicated on investor belief that there will be an opportunity for pot companies to succeed as more states legalize hemp, CBD oil, and cannabis for medicinal and recreational purposes.
Eighteen U.S. states have already legalized recreational cannabis for adults, as has the District of Columbia, and more states are expected to follow suit in the coming years. Proponents cite public opinion polls, which show support for legalization has grown to well beyond half of the nation.
Investors—and cannabis enthusiasts looking to profit from legalization—have since looked for opportunities among penny stocks springing up in the industry. However, these investors would be wise to question the underlying business fundamentals of these companies. Being involved in a new industry alone isn't enough to create compelling value for investors. To give you an idea just how dramatically overvalued recreational marijuana penny stocks have become, take a look under the hood; here are some of the top pot penny stocks that have been gobbled up by shareholders in the early years of legal cannabis.
General Cannabis Corp. (OTCQX: CANN)
Here is a stock which increased pretty significantly, only to experience a crash. In 2016, the stock was trading at around $0.75. After a year, that value shot up to as high as $8.00 per share. As of June 27, 2021, shares have dipped below 2016 levels—down to roughly $0.62.
CANN trades over the counter (OTC), which means that it is not listed on a traditional stock exchange like the New York Stock Exchange (NYSE) or NASDAQ. However, shares can still be purchased through many traditional brokerage accounts. Even if you can purchase CANN shares, you might want to proceed with caution. During the bullish run they had in 2017, there were still some troubling details in their financials:
- The shares increased in price in-line with the dramatic increase in cannabis trading activity. Thousands of people felt (all at the same time) that there may be some upside to cannabis-related companies. However, that trading activity and interest dramatically dropped throughout 2019, and CANN shares have moved lower as well.
- During the price run-up, the money flow demonstrated that there was about $16 million in fresh cash coming into this tiny, obscure company. Without that influx of money, the shares had nothing (no significant underlying value) to hold them at those levels. Therefore, as the money started to slosh back out of this investment, the shares dropped much lower.
There's another trend here that should trouble investors, and that's the idea of companies being only vaguely related to the cannabis industry. CANN explains that they are involved with consulting, advisory, marketing, and management services to the marijuana industry. In other words, they do not have a clear, narrowly defined purpose. What they do have is the word "cannabis" in the name of their company, and that may have helped their shares during the miniature stampede to pot stocks in 2017.
In the nine months ending Sept. 30, 2019, CANN brought in just over $4.2 million in revenues. During that same time, CANN posted more than $12 million in operating costs. In other words, CANN operates at a loss of nearly $8 million. Even if they liquidated every single thing they owned—pens, paper, coffee cups, and everything else—they would still be worth less than some negative value.
GreenGro Techs (OTC Pink: GRNH)
This stock has tremendous range and has often grown by multiples from any given low point. Its lowest traded price occurred in October 2020 and was below one penny per share ($0.0019 to be exact).
From this low point the stock reached a price of twenty cents per share two months later. That is a price increase of over 100 times, though the price also fell by more than 90% from this high to hover between one and two cents a share midway through 2021. This kind of price action is not for the faint of heart.
The chart for GRNH mirrored CANN up until 2018, and when the entire industry is acting the same, you know that the price moves are not based on the underlying companies, but are rather being moved by the stampede surrounding the overall concept of the industry.
The difference between a concept and a company is that the company could find a way to justify its share price, usually through profits. A concept alone, on the other hand, will typically not be strong enough to justify share prices. In other words, the stocks are increasing because of the underlying idea of cannabis legalization. There is no specific value there, nor is there a reason for any specific penny stock to appreciate.
A look at the company's financial statements doesn't give investors much more peace of mind. The company posted a net loss of more than $3 million for 2018. While that's an improvement over 2017's loss of more than $8 million, it might not be enough to inspire confidence in investors for a stock whose value has fallen below a penny.
Aurora Cannabis (NYSE: ACB)
Aurora entered 2019 on a high. Shares had increased more than tenfold from just three years prior. It is also listed on the NYSE, lending some credibility to investors. In June 2021 shares of ACB traded for around $9 per share.
In Q2 of 2021, Aurora brought in an impressive $70.3 million in revenue, up 11% from the same period a year earlier. The company had a positive net income after years of losses before. The balance sheet also looks better than the ones above: $150 million in current assets and only $75 million in current liabilities.
Aphria (NYSE: APHA)
Unlike many cannabis-wannabes, who aren't selling flower yet, Aphria is actively producing hydroponic cannabis with the help of the Canadian government and selling it for medical use. Aphria, as well as other cannabis companies with Canadian government partnerships, may be around for years to come. APHA's shares rose nearly six-fold between 2016 and the beginning of 2019. Also, similar to Aurora (but unlike cannabis companies trading on the pink sheets), Aphria trades on the well-known and investor-trusted NYSE.
Investing well has to do with owning shares in companies that are growing fast, financially secure, and expected to expand their market share rapidly. They need to have the wind at their backs, as well as a loyal client base that supports their recurring revenues while taking on larger order sizes. Many of the Canadian-based pot companies can lay claim to such price drivers, and as such, they should be able to harness the current shift in the social fabric in North America. It will help to keep the upward momentum going.
Canopy Growth Corp. (NYSE: CGC)
The trading chart of Canopy Growth Corp. looks similar to the trading charts of the other cannabis-related companies in 2015 and 2016. Since then, the stock saw a nearly 30-fold increase going into the beginning of 2019, only to suffer a slowdown later in the year.
This is another company based out of Canada, and as such, it has the advantages that come with operating within a country that has legalized cannabis on a national level. Even after the stock's slump throughout 2019, Canopy still boasts one of the biggest market caps in the cannabis industry—more than $5 billion. Canopy's financials are bolstered by more than $6.1 billion in assets, compared to under $2 billion in liabilities.
Revenue is also on the rise. In the three months ending Sept. 30, 2019, Canopy brought in roughly $57.8 million, compared to roughly $17.6 million in the same time the year before. However, more than 200% of revenue growth wasn't enough to match the market's high estimates for growth. On the first day of trading after the revenue figures were made public, shares of Canopy opened with a roughly 15% drop. And like many companies in the cannabis sector, Canopy is operating at a loss. In the quarter ending Sept. 30, 2019, Canopy posted a net loss of roughly $282.8 million.
Still, Canopy has some of the strongest growth figures in the sector. That—along with high-profile partnerships with celebrities like Martha Stewart, Seth Rogan, and Drake—makes Canopy an interesting company that may be worth watching in the years to come.
The Bottom Line
Many people believe that cannabis is growing in popularity and it will become increasingly legal in the United States and elsewhere. However, investors should be cautious about assuming that companies in the industry will see their stock prices increase. Stock prices seldom correspond so neatly with broader societal trends.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.