The latest edition of the Marijuana Business Factbook by Marijuana Business Daily predicts that legal weed sales in the United States could triple to $ 37 billion by 2024. With more US states giving the green light to recreational and medical cannabis each year, and the Canadian industry solving its problems. problems, the sky is the limit for North American jar stocks – well, most of them at least.
Even the fastest growing industries have delays that investors should avoid at all costs. In November, there are three pot stocks that cannabis stock investors might want to avoid.
The first is Canopy growth (NYSE: CGC), the largest pure-play marijuana stock by market cap.
Investors seem to like Canopy a lot. For example, he has the largest stack of cash of all pure-play pot stocks, and the spirits giant Constellation marks (NYSE: STZ) holds a stake of almost 38% in the company. This stack of cash acts as a kind of downward buffer for Canopy’s share price, while Constellation is an invaluable (and vested) partner in its future.
However, any positive that investors can find for Canopy Growth will trump three important negative catalysts.
For starters, Canopy Growth, like its licensed Canadian counterparts, faces low-cost illicit cannabis on the black market. A combination of having to delay the launch of higher-margin derivatives, coupled with the strength of value cannabis, means that Canopy Growth’s margins are shrinking.
Second, the business loses money over the years. Even after the closure of 3 million square feet of licensed indoor cultivation, the postponement of the opening of the Niagara-on-the-Lake plant, the layoff of workers and the substantial reduction in stock compensation, Canopy Growth still lost C $ 108.5 million in the first fiscal quarter (ended June 30). It should be noted that even with substantial reductions in stock compensation, this expense still represented nearly C $ 31 million in costs in the first quarter of 2021. According to Wall Street, it could be another four years before the business does not enter the profit column.
Third, the company’s cash flow cushion is not as secure as you might think. That pile of cash stood at nearly C $ 5 billion following an investment by Constellation Brands in November 2018, but was reduced to just over C $ 2 billion. Keep in mind that this C $ 2 billion includes C $ 245 million from Constellation Brands exercising warrants earlier this year. Without this extra money, Canopy would have burned two-thirds of its money in less than two years.
Despite its brand and stack of cash, Canopy Growth should be avoided by investors.
Harvest health and recreation
While US pot stocks offer a lot more benefits than licensed producers in Canada, not all US marijuana stocks are worth your hard-earned money. In November, vertically integrated multistate operator (MSO) Harvest health and recreation (OTC: HRVSF) is a name I would suggest avoiding.
Around the same time last year, I was actually very excited about the future of Harvest Health. It adopted a heavy acquisition strategy designed to push the number of dispensary licenses above 130 and expand its presence in more than a dozen states. The company also entered into an agreement in June 2019 with the Asian American Trade Associations Council (AATAC) to supply proprietary and wholesale cannabidiol (CBD) products to more than 10,000 convenience stores and gas stations across the country.
Sounds like a pretty solid growth plan, right? Unfortunately, he encountered many obstacles.
For example, the CBD growth train completely derailed in the second half of 2019. The US Food and Drug Administration decided not to allow CBD as an additive to foods, beverages, and dietary supplements, which limited the applications of CBD. In other words, Harvest’s CBD deal with AATAC hasn’t changed the game investors have been waiting for.
Another problem is that Harvest Health bit more than it could chew on the acquisition front. With the changing dynamics of the marijuana industry, Harvest was forced to cancel two buyout deals – Falcon International and Verano Holdings – and focus on cutting expenses. Despite more than double sales in the second quarter, Harvest Health still lost $ 18.5 million. Compared to other large MSOs, it could be the last vertically integrated operator to generate recurring profit.
While I don’t like Harvest Health, its rating makes little sense given how much this company has yet to prove itself to Wall Street and investors.
Absolutely no list of jar stocks to avoid, because the plague is never complete without Cannabis Aurora (NYSE: ACB) get his time in the spotlight.
Aurora is the most popular cannabis stock among millennial investors and, until May, was the most held stock on the Robinhood online investing app. The company’s drive to become the world’s largest producer of marijuana, along with its access to two dozen markets outside of Canada, had to be insurmountable competitive advantages. But not much has gone as planned.
Aurora Cannabis may blame some of the blame on Canadian regulators, which have delayed the launch of high-margin derivatives and delayed approving licenses for cultivation and sale. Provincial regulators in Ontario, Canada’s most populous province, haven’t been much better. A now-abandoned lottery system for granting dispensary licenses resulted in just 24 locations opened before the one-year anniversary of the legalization of weed sales to adults.
But to divert everything on the regulators would be a mistake. Aurora Cannabis is a poorly run business that has rightly lost around 96% of its value in the past 19 months. It expanded its capacity far beyond what was needed at home, struggled to generate significant income outside of Canada, and depleted its cash flow at an alarming rate. The company’s only response to its capital concerns is to continue issuing common stock that drowns its shareholders.
Aurora Cannabis has also largely overpaid for all of its acquisitions. Specifically, the company paid C $ 2.64 billion to acquire MedReleaf. As a result of the deal, Aurora shut down MedReleaf’s Markham facility (7,000 kilograms of annual production) and sold the million square foot Exeter greenhouse for a paltry $ 10.25 million CAD. . The final total of this deal is 28,000 kilograms of annual cannabis production and a handful of proprietary brands.
It continues to be one of the worst managed cannabis stocks in North America, and it should be avoided like the plague.