3 Dawdling Cannabis Stocks: Can They Catch Up?

Across the board, this has been a great year for marijuana stocks. The ETFMG Alternative Harvest (NYSEMKT: MJ) portfolio contains companies with a diverse range of business models focused on the cannabis industry. Shares of this exchange-traded fund (ETF) have soared 36% in 2019.

Not every stock in the Alternative Harvest portfolio is doing so great, though, especially these three. 

Data source: Yahoo! Finance.

Here's a look at why they've been lagging behind their industry, and what needs to happen if they're going to bounce back. 

1. Auxly Cannabis: A long wait

This vertically integrated cannabis company has acquired a diverse range of cannabis facilities and businesses, but the revenue side of this equation was less than zero last year. That's because Auxly doesn't sell anything Canadians can buy yet. In 2018, the only revenue Auxly recorded was related to research services for customers conducting clinical trials. This segment generated CA$747,000 in top-line revenue, but Auxly also spent CA$1.1 million fulfilling those services. 

Auxly investors will just have to wait until Health Canada writes the rules for cannabis edibles and other derivatives products and allows their sale. That should occur before the end of October, and in the meantime, Auxly will begin selling raw cannabis into the dry cannabis market.

Auxly has entered into agreements with a handful of Canada's smaller licensed producers that generally involve an equity stake, and rights to purchase the cannabis they produce at a discount. The company also makes long-term investments in other cannabis businesses intended to help the company integrate vertically, but this lean structure isn't working out so well.

In 2018, the fair value of just four of Auxly's long-term investments rose slightly, while the other 12 fell. With such a lousy track record and nothing to sell but dry flower until the last half of the year, Auxly stock probably isn't going to bounce back in the foreseeable future.

Image source: Getty Images.

2. KushCo Holdings: Shrinking margin

States with heavily regulated marijuana programs, such as California and Florida, have stringent packaging rules, and KushCo is the go-to source for meeting the demands that come with selling licensed cannabis. This cannabis packaging-and-accessory company isn't as exposed to fluctuating prices as the businesses it serves, but the stock hasn't performed well this year, for a couple of reasons.

First, KushCo completed a direct offering in January that boosted its share count by around 9.7 million. The company's market cap has gained 12.3% in 2019, but all those extra shares allowed the price to rise just 2.3% this year.

KushCo's stock price has also been under pressure thanks to a shrinking gross margin. During the company's fiscal second quarter, which ended on Feb. 28, gross profit fell to just 12.9% of revenue, compared with 28.1% a year earlier.

Inventory write-offs that probably won't repeat played a big role in reducing KushCo's gross margin. The company has also expanded its product line to include increasingly popular vaporizer cartridges, plus the solvents and gases to create stuff that goes in those cartridges. This changing product mix, combined with some discounting to maintain market share, has also squeezed margin.