Though 2018 was in many ways “The Year of Cannabis,” a number of signs are pointing to an industry-wide recession. And although the market bubble around cannabis is almost ready to burst, the industry will come out all the better on the other side. As the reach of the legal cannabis industry spreads across the globe, there are no doubt different risks facing investors. However, most companies will make it through the other side.
Here are the three pot stocks most at risk when the market bubble pops on cannabis.
Aphria loses the high road
Investors need to look at Gabriel Grego’s scandalous claims about Aphria Inc. (TSX:APH) (NYSE:APHA) as a wake-up call. The accusations — still yet to be proven —come at a time when everyone is guilty of having their heads in the clouds. It is too easy to be caught up in the excitement of a legal marijuana market, but now is the time to get focused and pay attention to what could potentially make or break a portfolio.
[Cannabis news briefs: Altria buys Cronos, Trump nominates Barr, Michigan lights up]
With the holidays upon us, cannabis investors should wish for a happy ending for Aphria. The pot stock just started trading on the NYSE on November 2, but the New Year could see it pulled from public trading if the claims turn out to be true. The company released a statement in response to Grego’s accusations, urging investors to “exercise caution in relying on the misrepresentations and distortions contained in the report,” but it almost comes as too little too late for some investors.
For those cannabis investors who do not want to be caught off guard by untrustworthy companies or investments, it would be wise to take this moment to assess the craze surrounding pot stocks like Aphria and the others on this list.
Tilray’s IPO lock-up period is set to expire
Investors should be wary of that positive bubble of news that follows Tilray (NASDAQ:TLRY) around lately. It will likely burst come January. The pot stock’s IPO lock-up period is set to expire on January 15, and the nine million shares Tilray issued this past summer will hit the market. At the time of the IPO, insiders were barred from selling their shares for 180 days. In those six months, Tilray’s stock price fluctuated from the $16.74 to the $97.14, with heights of $300 in between.
If gains stay that high through the holidays, investors can bet it will be likely that insiders will sell most if not all of their 9 million shares come January.
[Cannabis stock report: Cronos Group sees more money to come into industry after landmark deal with Altria]
Despite dilution woes, Tilray continues to throw money at up and coming cannabis companies. The pot stock, along with its subsidiary High Park Holdings, recently completed the first tranche of its $4.5 million investment in Inner Spirit Holdings (CSE:ISH). In six months, the companies will exchange $2.25 million worth of common shares, which will only further aggravate the dilution they are already facing.
Tilray is not the only pot stock plagued by dilution. Even Aurora is not immune. But unfortunately for Tilray, which has been used as benchmark for many American cannabis companies, the dilution of their stock could send the whole market into a panicked frenzy. Investors would be wise to keep their distance if they wish to protect their portfolio from further market fluctuations. While the negative effects may not be long-term, the expiration of Tilray’s lock-up will serve as a reminder for investors to stay focused.
Supreme Cannabis arrives too late
What could have been a solid investment, Supreme Cannabis (TSXV:FIRE) (OTCQX:SPRWF) might just be too late to the game. By 2019, the market is likely to be saturated. According to the Brightfield Group, today’s dispensaries are carrying over 150 different cannabis brands, nearly double the amount of commercial brands that were on shelves two years ago. With that kind of competition, Supreme’s recent endorsement by Wiz Khalifa could very well be just another brand of celebrity-endorsed marijuana that is forgotten about on dispensary store shelves.
[Liberty Health Sciences sends swift rebuttal of short seller with solid Q3 financials to back it up]
Even their recent $12 million supply agreement with Tilray could potentially flounder with the expiration of Tilray’s IPO in January.
The company itself is playing the game correctly; it is just their timing that is off. Supreme just hit the scene in the summer of 2017, completed their $100 million bought deal offering in October, and officially listed on TSX Venture Exchange on October 23. These moves gave the pot stock barely a year to catch up with the rest of the cannabis market’s top performers, meaning they are only now starting to touch the extraction industry, thanks to an agreement with MediPharm Labs.
With cannabis oils set to be a major part of cannabis’ global worth, it does not always pay to be late to the party. If investors are overlooking this pot stock now, Supreme’s potential to get lost in the white noise of public trading is too high come January.