Don’t bet on cannabis stocks

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In less than two years, cannabis stocks have lost billions of market values. Many of the key players in the emerging sector have lost half or more of their market value. First cannabis stock in Canada Canopy growth has plunged 63% in the past year. The largest ETF in the sector, the ETFMG Alternative Harvest ETF, lost 62%.

Despite some improved results from marijuana growers, such as Aurora Cannabis, significantly reporting, cannabis investors are suffering even more. While the global budding legal marijuana industry is here to stay, it will not be exactly the way industry experts have assumed.

Cannabis stocks facing headwinds

The global cannabis industry is undergoing massive rationalization. Similar to what happened after the Internet bubble burst in 2000, many cannabis companies will be sidelined; they will either be acquired by larger competitors or will cease to function. The most vulnerable are the cannabis companies with low balance sheets that bleed in red ink.

This vulnerability is amplified by the coronavirus pandemic, which has forced the closure of many dispensaries. The pandemic also makes it even more difficult for marijuana companies to access capital in a private finance industry.

There are also signs that the legal global cannabis market is not as large as originally thought. Some analysts estimate the total market value to be around US $ 40 billion by the end of 2023. Growing global demand for cannabis and legal by-products is threatened by the reluctance of many jurisdictions to fully legalize its medical use. to be creative.

This does not bode well for the profits from cannabis stocks, which bodes ill for an industry struggling with profitability.

Will this cannabis stock survive?

The difficult operating environment that exists now has seen the grower HEXO (TSX: HEXO) (NYSE: HEXO) said in its second quarter 2020 results that it did not have the financial resources to continue operating. As a result, HEXO has been shelled by the market, losing a whopping 92% in the past year. It could very well be worse for the cannabis grower.

For its second fiscal quarter 2020, HEXO reported a net loss of $ 298 million, about 75 times more than its net loss of $ 4 million a year earlier. Despite the sales turnover which jumped by 47% year on year to reach almost 24 million dollars. This significant loss can be attributed to significant intangible asset and goodwill impairment charges for HEXO, which totaled $ 218 million for the quarter.

The culmination of ongoing losses and concerns over liquidity has prompted HEXO management to issue a statement warning that the business may not remain in business unless it can raise additional funds. HEXO reported that it lacked sufficient capital to meet financing needs for debt, operations and working capital.

Since these results, HEXO has tapped the market for $ 46 million through a full subscribed share offering. While this gives HEXO some leeway, it has not resolved the underlying issues: a lack of profitability and a high level of liquidity. HEXO is in the enviable position of having the support of the brewer Molson Coors, which will help ensure its survival.

Stupid takeout

Cannabis stocks are not intended for shy investors. Persistent industry problems, mainly related to a lack of profitability, mean that many marijuana growers have to plan. For these reasons, it is best to avoid stocks of Canadian cannabis.

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Insane contributor Matt Smith has no position in any of the titles mentioned. The Motley Fool recommends HEXO. and HEXO.

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