For the longest time, marijuana stocks were virtually unstoppable. With tens of billions of dollars in sales conducted annually in the North American black market, it seemed only logical that legalizing cannabis in Canada and select U.S. states would lead to a rapid acceleration in revenue and market value for pot stocks.

Unfortunately, Wall Street and investors overlooked the fact that every next-big-thing investment needs time to mature. For the past 17 months, growing pains have walloped marijuana stocks, with supply issues persisting throughout Canada and high tax rates on legal product in select U.S. states making it difficult for licensed producers to compete against the black market.

But the tide may be shifting.

A businessman in a suit pressing the sell button on a digital screen.

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Two weeks ago, Aug. 14 marked the deadline for money managers and companies with at least $100 million in assets under management to file Form 13F with the Securities and Exchange Commission. A 13F provides a snapshot of what the smartest and richest money managers were up to in the most recent quarter — in this case, the highly volatile second quarter.

One interesting data point that stands out is that billionaire money managers added to or opened a stake in a number of cannabis stocks. Innovative Industrial Properties, GrowGeneration, Aurora Cannabis, HEXO, GW Pharmaceuticals, Scotts-Miracle Gro, OrganiGram, and Tilray all saw their aggregate ownership by 13F filers increase in Q2 from the sequential first quarter. You’ll note that I’m not including over-the-counter stocks on this list, since the vast majority of money managers won’t buy companies not listed on a major U.S. exchange.

At the other end of the spectrum were the only two marijuana stocks that saw billionaire money managers head for the exit in Q2.

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Canopy Growth

The first of two cannabis stocks that successful money managers wanted nothing to do with in the second quarter is Canopy Growth (NYSE:CGC). The largest marijuana stock in the world by market cap saw Philippe Laffont’s Coatue Management dump its entire 1.31 million-share stake and Ken Griffin’s Citadel Advisors selling almost its entire holdings (nearly 317,000 shares of a 327,000 share position). All told, 13F filers reduced their aggregate holdings in Canopy Growth by 6.2% (about 2.25 million shares) to 34.15 million shares.

In one sense, Canopy Growth is the most cash-rich cannabis stock in North America, and its new no-nonsense CEO David Klein hasn’t been shy about enacting cost cuts. Klein has significantly trimmed share-based compensation in just six months and overseen the closure of 3 million square feet of licensed indoor greenhouses in British Columbia. Canopy Growth also deserves credit for generating a reasonable amount of revenue in overseas markets. In the June-ended quarter, Canopy’s medical pot sales jumped 54% to $34.1 million Canadian.

While some belt-tightening was certainly in order, Canopy Growth still has a long way to go before it wins the trust of investors.

A dried cannabis bud and small vial of cannabinoid-rich liquid next to a Canadian flag.

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For instance, even though Canopy’s fiscal Q1 report featured robust international medical weed sales growth, its recreational revenue in Canada fell 11% from the prior-year period. This decline comes as Canada’s licensed cannabis stores reported record monthly revenue in Q2, and it follows the launch of derivatives (i.e., edibles, infused beverages, and vapes). In other words, there’s absolutely no excuse for Canopy’s poor domestic performance in the June-ended quarter.

Canopy Growth’s balance sheet is also not as pristine as you might think. Although its cash, cash equivalents, and short-term investments were relatively unchanged in the latest three-month period at roughly CA$2 billion, this is only because Constellation Brands exercised options worth about CA$245 million. Without this direct equity investment, Canopy’s cash position would have dwindled by two-thirds in a span of six quarters.

In addition, Canopy Growth’s shareholder equity is also bound to take a hit. The company’s goodwill now accounts for 28% of total assets, and there’s a growing likelihood that additional inventory or property, plant, and equipment impairments may be needed. 

There’s long-term potential for Canopy Growth to succeed, but billionaire money managers simply aren’t willing to wait.

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Cronos Group

The other cannabis stock that had billionaire money managers running for the exit during the second quarter is Cronos Group (NASDAQ:CRON). The most prominent seller here was Ken Griffin’s Citadel Advisors, which dumped more than 459,000 shares of its stake. As a whole, 13F filers reduced their holdings in Cronos by over 5.1 million shares from the sequential first quarter, or 10.8%.

What’s really interesting about Canopy and Cronos being the only two pot stocks that billionaires were selling is Canopy and Cronos are No. 1 and No. 2 in terms of cash on hand. Cronos ended its most recent quarter with approximately $1.32 billion in cash, cash equivalents, and short-term investments. You’d think this cash would inspire confidence in investors, but this just hasn’t been the case. 

At least when it comes to Canopy Growth, sales are picking up significantly in international markets. When it comes to Cronos, it still hasn’t hit $10 million (that’s U.S. dollars) in sales in a single quarter. The selling we witnessed by money managers in the second quarter would appear to signify their displeasure with Cronos’ weak growth in what should be a period of robust expansion.

A bearded man wearing sunglasses who's exhaling vape smoke while outside.

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One of the biggest knocks against Cronos is that its ambitions to become a vape leader have, thus far, gone up in smoke. If you recall, tobacco giant Altria Group (NYSE:MO) invested $1.8 billion into Cronos in March 2019, giving it a 45% stake in the company. With decades of knowledge in developing and marketing smokable products, and now an obvious financial interest, it seemed like a no-brainer that this dynamic duo would excel when it came to vape products.

However, vape-health concerns arose in the U.S. around this time last year, which health regulators eventually traced back to vitamin E acetate. Furthermore, two Canadian provinces have outright banned the sale of vape products for the time being (Quebec and Newfoundland and Labrador), with Alberta lifting its two-month ban earlier this year. Put simply, vape sales have disappointed thus far.

There’s also the issue that Cronos Group was never built to be a major marijuana producer. With derivative product launches delayed, licensed producers capable of significant dried flower output have been able to at least generate tens of millions of dollars in sales each quarter. Cronos’ only large cultivation asset is Peace Naturals, which can yield just 40,000 kilos a year, at maximum.

Cronos simply isn’t a major pot stock but has been treated like one for years. According to trading activity in the second quarter via 13Fs, Wall Street appears to be wising up.

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