The Motley Fool

This Cannabis Stock Is Down 40%: Read This Before You Buy

Image source: Getty Images.

When I published that Hexo Corp (TSX:HEXO) was my top cannabis stock for 2019, timing was on my side.

Shares have risen by more than 50% since that call, fueled by the rapid inflow of capital into the cannabis sector. Indeed, a rising tide lifts all boats.

With nearly every cannabis stock up big since 2019 began, many investors are searching for companies that have been left out of the race. Down 40% on the year, many bargain shoppers are sniffing around Namaste Technologies Inc (TSXV:N) stock.

Is Namaste a hidden value in a red-hot industry? Let’s compare it to Hexo Corp to find out.

Here’s the big difference

Namaste Technologies doesn’t grow marijuana. Nearly every other pot stock does.

For example, Hexo just opened its 1,000,000-square-foot growing facility. Production should slowly ramp this quarter, ideally reaching full capacity by the end of 2019. With licenses and purchasing agreements with many of Canada’s provinces, Hexo has a clear path to grow revenues and cash flow quickly.

Namaste is in no such position given that it’s basically an e-commerce business that sells hardware and accessories like vaporizers. It also has a nascent telemedicine app which aims to serve medical marijuana patients.

According to a Motley Fool exclusive, the app provides “a free virtual consultation with a licensed health-care professional to obtain a prescription for medical cannabis. From there, NamasteMD then gives patients several options to fill their prescription and buy medical cannabis.”

Hardware and software for the burgeoning marijuana industry could still result in big business, but it’s critical to note Namaste’s strategic differences.

What’s not to like?

Namaste has already secured nearly a dozen medical cannabis providers as clients. One of its most recent deals gave it leading sales access to the 1.5 million strong indigenous population. Management wants to hit 200,000 patients by the end of this year.

How do these developments lead to a 40% drop in share price?

With a market capitalization just over $200 million, Namaste is now one of the smallest cannabis stocks left on the market. Unfortunately, it probably deserves this valuation.

In October, short-seller Citron Research release a damning report that called Namaste a “complete fraud.” The research organization essentially accused Namaste’s CEO of a pump-and-dump scheme, saying it made a “fake claim of a Nasdaq Inc listing to get investors to buy the stock.”

A few months later, following an investigation, Namaste’s board of directors fired the CEO in question.

This stock is a mess

At this point, it’s difficult to sort out fact from truth for Namaste.

In February, its board of directors revealed that it would “consider all value-maximizing alternatives” to the company’s future. Most investors took that as a signal that Namaste would attempt selling itself completely, a difficult pill to swallow give its rock-bottom valuation following the executive scandal.

Either way, this is not the pot stock you want to buy. While shares of Hexo give you a de-risked way to directly profit from rising cannabis sales, Namaste is a significantly more complex story. All that it has at this point is an association with the cannabis industry—that’s not enough to earn my investment.

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ryan Vanzo has no position in any stocks mentioned.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.