Do Marijuana Stocks Have a Trust Problem?

For years, the marijuana industry has been thriving, and the expectation is that even greener pastures await. After all, according to a recently released report from Arcview Market Research and BDS Analytics, “The State of Legal Cannabis Markets,” global weed sales should grow at a better than 24% annual clip through 2024 to north of $40 billion. Mind you, this figure focuses on licensed-store pot sales, but excludes cannabinoid-based pharmaceuticals and general-store cannabinoid revenue. Nevertheless, it signals robust growth in the years that lie ahead.

Yet, if things are so perfect for the budding pot industry, you might be wondering why the bulk of cannabis stocks have been sinking for nearly four months.

Cannabis stocks face a wide range of challenges

Part of the blame rightly goes to Health Canada in our neighbor to the north, and state-level legislatures in U.S. states that legalized recreational marijuana.

In Canada, regulatory agency Health Canada has been contending with an overabundance of licensing applications since day one of recreational legalization. Although nearly 200 companies have received a cultivation, processing, or sales license through this past week, a monstrous stack of more than 800 applications awaited review when the calendar switched over to 2019. Even with Health Canada making changes to its cultivation application policy, the Canadian dried flower shortage isn’t going to be corrected overnight, or anytime soon for that matter. In fact, it could very well carry over into the launch of derivative cannabis products in mid-December.

In the United States, the legal industry has struggled under the weight of exorbitant taxation. In California, for example, some locales are being burdened with aggregate tax rates of as high as 45% for legal weed. This involves the aggregate sum of the state tax, local tax, marijuana excise tax, and a wholesale tax on either dried flower or cannabis leaves. The Golden State’s projected tax revenue in its first full year of recreational pot sales wound up badly missing estimates.

Federal regulators could be to blame, too, given that cannabis stocks have struggled to gain access to nondilutive forms of financing. Although Canadian pot companies do now have access to loans and lines of credit, U.S. marijuana stocks are still predominantly shut out of the traditional banking system, with any attempts to alter this at the congressional level met with opposition in the Senate.

But maybe the biggest problem marijuana stocks are contending with is a lack of investor trust.

Pot stocks appear to have a trust problem

From nearly off-the-radar cannabis stocks to the most popular names in the entire industry, pot stocks have been pushing the boundaries of trust with investors for quite some time — and investors look to now be pushing back. Below, you’ll see three ways that marijuana stocks are violating their trust with shareholders.

1. Conflicts of interest

One way marijuana stocks may have violated the trust of investors is by engaging in deals that had clear conflicts of interest. Both Namaste Technologies(NASDAQOTH:NXTTF) and Aphria (NYSE:APHA) were guilty of such occurrences.

In October, Namaste Technologies was accused of fraud by noted sell-side firm Citron Research, which often holds shares short in the companies it issues scathing reports on. Although an independent review found no merit to Citron’s fraud allegations, it did uncover that now-former CEO Sean Dollinger had sold company assets to a related party without making the appropriate disclosure to investors. Dollinger was terminated with cause, and Namaste’s stock has been floundering ever since.

Aphria faced a similar fate in early December when Quintessential Capital Management and forensic analysis firm Hindenburg Research alleged that it had grossly overpaid for its Latin American assets. Here, again, those claims proved false. However, the independent committee review did uncover conflicts of interest in these purchases that led to a few executives stepping down, including longtime CEO Vic Neufeld. Today, Aphria remains one of the least expensive companies from a fundamental perspective, primarily because investors are struggling to trust management…

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