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Why Aurora Cannabis, Cronos Group, and Canopy Growth Plunged in July

Joe Tenebruso, The Motley Fool
Updated

What happened

Shares of Aurora Cannabis (NYSE: ACB), Cronos Group (NASDAQ: CRON), and Canopy Growth (NYSE: CGC) all fell more than 13% last month, according to data provided by S&P Global Market Intelligence, after a regulatory scandal spooked investors.

So what

Cannabis stocks were rocked by the news that Canadian producer CannTrust Holdings (NYSE: CTST) was busted by regulators for illegally growing cannabis in unlicensed rooms. Soon thereafter, CannTrust fired its CEO. Worse still, the company suspended its sales of cannabis products and is facing disciplinary measures by Health Canada that could include a loss of its production license.

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The CannTrust debacle highlighted some of the risks inherent in cannabis investing. While it's unlikely that Aurora, Cronos, or Canopy Growth would make the same mistakes as CannTrust, investors appear to now be pricing the possibility of compliance failures into their valuations of cannabis stocks.

A sign post with signs labeled risk, profit, and loss.
A sign post with signs labeled risk, profit, and loss.

Image source: Getty Images.

Now what

Despite the risks, the cannabis market remains fertile ground for growth investors. Analysts at Stifel project that the cannabis industry will generate $200 billion in annual sales within the next decade, up from about $12 billion in 2018. The companies that can compete and win within this rapidly growing industry could generate enormous returns for investors in the years ahead.

In this regard, Aurora Cannabis, Cronos Group, and Canopy Growth all stand to benefit from the cannabis industry's explosive growth. Aurora is the leading producer by peak production capacity, while Canopy Growth and Cronos are the most cash-rich producers. These are powerful competitive advantages, which should serve these companies -- and their shareholders -- well in the coming decade.

Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool recommends CannTrust Holdings Inc. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com