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The horror: Pot stocks collapse 30% in a month

Some of the gloss has worn off the medical marijuana hopefuls in the past month:

source: Google Finance

Auscann Group Holdings Ltd (ASX: AC8) was the worst affected, with a 44% decline, although many hopefuls like Zelda Therapeutics Ltd (ASX: ZLD) and MGC Pharmaceuticals Ltd (ASX: MXC) have also been sold off.

Creso Pharma Ltd (ASX: CPH) has lost 36%, Hydroponics Company Ltd (ASX: THC) is down 25%, and Cann Group Ltd (ASX: CAN) has lost 18%. Surely things couldn’t get any worse?

My bet is that they will. These companies haven’t been listed for very long at all – not long enough to post annual reports revealing huge cash outflows and/or conduct more capital raisings.

Auscann is reputedly one of the more promising businesses in the sector and its most recent quarterly report revealed revenues of zero and cash outflows of $1.8 million. It just raised another $12 million by issuing new shares and I estimate has around $16 million in cash. While it might be close to generating its first revenues, it is hard to evaluate if they will be enough to create any sort of return for shareholders.

Yet Auscann has 247 million shares on issue which, at today’s prices, value the company at $97 million. Is it possible for a company with no sales and $16 million in cash (and very few other assets) to be good value or even fairly priced at $97 million?

Well, that is a good question. I don’t have the answer – I am steering clear of pot stocks. This is the type of question all shareholders of pot stocks should ask themselves – because things just might get worse, and there’s no guarantee they’ll get better.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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