3 Cannabis Stocks to Avoid Now

Twitter icon
stock chart increase and decrease

 

If the government could just get out of the way of marijuana, it could realize its full potential as a massive growth opportunity. Unfortunately, a tax and regulatory morass on the state level, coupled with its continuing classification as an illegal substance federally, has put roadblocks in front of otherwise good pot stocks.

Other cannabis stocks, however, seem to go out of their way to sabotage themselves and their investors. Canopy Growth (NASDAQ:CGC), Charlotte's Web Holdings (OTC:CWBHF), and Aurora Cannabis (NASDAQ:ACB) should be avoided because of self-inflicted wounds that hold them back.

Oh, Canada

Eric Volkman (Canopy Growth): I feel that Canopy Growth is not only a stock to avoid now, but likely one to keep away from well into the future. 

Since the 2018 entry of a strategic (and deep-pocketed) partner, liquor company Constellation Brands (NYSE:STZ), Canopy Growth has been seen as one of the sector's incumbents. But prominence and a dedicated investor do not necessarily a good stock make.

Canopy Growth is a poster child for the typically loss-making marijuana industry, with consistent annual bottom-line deficits that have deepened worryingly of late.

 

A total of 1.74 billion Canadian dollars ($1.37 billion) was the damage in full-year 2020, which spooked even the hardy investors who endured the 2019 loss of over CA$1.3 billion ($1 billion). Which, in turn, was nearly double the CA$736 million ($579 million) shortfall of 2018.

Canopy Growth spends a lot of money on asset buys, attempting to broaden its product range, widen its network, and take some market share.

A clutch of acquisitions (the latest one being quality Canadian producer Supreme) have certainly bulked it up and kept it relevant in its home market. Despite this, it still managed to post sequential revenue declines in its last two reported quarters. Many were impressed by the fact that Canopy Growth posted a rare, seemingly quite substantial net profit of CA$390 million ($307 million) in the most recent of those two periods (the first quarter of fiscal 2022). However, digging into the earnings literature, we see that this was due to what the company says was "Other Income totaling $581 million during Q1 2022 primarily attributable to non-cash fair value changes of [CA]$601 million."

Fair value changes are essentially accounting adjustments based on how a company values its inventory, and the costs of selling it. This is a feature of the International Financial Reporting Standards (IFRS) more than a few Canadian marijuana companies use, and these estimates aren't necessarily considered pinpoint-accurate. So that nine-digit profit might not be all it's cracked up to be, to put it tactfully.

Finally, Canadian pot companies as a group have fallen out of investor favor next to their American counterparts.

This is reasonable. The U.S. market is far larger, it isn't maturing like Canada (which flipped the switch on the first, crucial stage of recreational marijuana legalization nationwide in 2018), and for the foreseeable future it's closed to direct Canadian exports (the drug is still technically illegal at the federal level, after all). The companies that will get the real jump on the U.S. market, most likely, will be U.S. operators.

 

This CBD stock isn't what it used to be

Alex Carchidi (Charlotte's Web Holdings): Sometimes, it's best to avoid a company that isn't getting much from its leadership position in a market. 

On that note, Charlotte's Web makes a smattering of wellness products for humans and pets, all of which contain cannabidiol (CBD), a chemical derived from cannabis. Whereas typical cannabis goods might be inebriating, CBD isn't, and proponents claim that it has beneficial effects, like reducing anxiety. So the market for CBD isn't the same as the burgeoning markets for medicinal and recreational cannabis, though there is probably some overlap. 

 

Per the company's latest earnings report, second-quarter revenue only grew by 11.4% year over year to reach $24.2 million, which is far too low for a relatively small business that investors might look to for robust growth. And quarterly revenue seems to have stagnated after 2019, when it brought in $25 million in the second quarter. 

On top of this slowing demand, profitability has remained out of reach for the last two years. That was doubtlessly caused by sharp rises in Charlotte's Web's cost of goods sold (COGS) and its selling, general, and administrative (SG&A) expenses since 2018. At least some of the increased SG&A expenditures stem from growing its marketing channels and spending to maintain and expand its leading market share in several distribution segments. In 2020, Charlotte's Web was the largest CBD pure-play competitor in e-commerce, food stores, drugstores, natural specialty retail, and mass retail.

Still, being the top dog in these segments of the CBD market hasn't led to significant revenue growth or significant returns for investors over the last few years. So investors should steer clear of this stock until management demonstrates that the company's leading market share is actually beneficial to shareholders.

 

Quality control concerns

Rich Duprey (Aurora Cannabis): Although Aurora Cannabis remains one of the most widely held stocks on the Robinhood platform (it's currently 14th), it doesn't warrant the loyalty investors have showered on the business. 

Sales last quarter tumbled 21% from the year-ago period, but the consumer segment plunged by half. Although the Canadian government is more zealous in ordering widespread lockdowns beyond what we see in the U.S. in a bid to fight COVID-19, Aurora exacerbated the situation by going on an acquisition spree in which it overpaid for production and distribution capabilities. 

It has since written down large chunks of those costs. In many instances, that was because it hasn't been able to achieve the kind of premium, high-quality flower its growth strategy requires, particularly at Sky, which was going to be its flagship greenhouse. Today, Sky operates at just 25% of its capacity as it continues to work through the issues there.

Equally disturbing has been Aurora's willingness to dilute its existing shareholders to continuously raise cash. In May, it announced a new plan to sell up to $300 million worth of stock in an at-the-market offering, and though such sales have enabled the pot stock to pay off one of its credit facilities, it still has some $300 million in long-term debt. To its credit, it has $525 million in cash. So while it ought to be positioned for growth, its internal misfirings keep dragging it down.

The stock is down 20% year to date, but it has lost almost two-thirds of its value from the highs it hit earlier this year. There may very well be a time Aurora is a buy, but that time is not now, and investors should avoid the stock. It needs to prove it can consistently get the sort of high-quality production from all of its facilities so that its goal of being a premium producer can be realized.

e-mail icon Facebook icon Twitter icon LinkedIn icon Reddit icon
Rate this article: 
Article category: 
Regional Marijuana News: