While investors’ eyes are on tech stocks, cannabis may be one of the fastest growing industries in North America over the next decade.
The latest edition of the Cannabis Business Information Book from Trading in cannabis daily forecasts that legal weed sales in the US are likely to triple to $ 37 billion by 2024. With many US states greenlighting recreational and medical marijuana annually and Canadian industry is growing its problems, the sky is the limit for pot stocks in North America – at least most of them.
Even the fastest growing industries have lags that investors need to avoid at all costs. In November, there were three major stocks that cannabis stock investors would wisely stay away from.
The first is Canopy growth (NYSE: CGC)The largest, pure cannabis stock by market cap.
There are a lot of things that investors seem to like about Canopy. For example, it has the largest pile of cash of any pure game stock and brandy Brand constellation (NYSE: STZ) owns nearly 38% of the company’s shares. This cash act serves as a bearish buffer for Canopy’s share price, while the Constellation acts as an invaluable (and awarded) partner in its future.
However, any positives that investors might put up for Canopy Growth will have three sizable negative catalysts.
To begin with, Canopy Growth, like its Canadian licensed peers, is confronted with cheap illegal cannabis from the black market. The combination of having to delay the launch of higher margin derivatives, coupled with the power of value cannabis, means that Canopy Growth’s margins are falling.
Second, the company is at a loss due to holding hands. Even after the closure of 3 million square feet of licensed indoor farming, through the opening of the Niagara-on-the-Lake facility, layoffs of workers and a substantial cut in equity-based compensation, Canopy Growth still lost $ 108.5 million in its first fiscal quarter (which ended June 30). It’s worth noting that even with a substantial cut to the equity-based compensation, this would still account for nearly CA $ 31 million in first quarter 2021 costs. According to Wall Street, it could take another four years. New companies push into the profit column.
Third, the company’s cash buffer isn’t as secure as you might think. This amount of cash reached almost CA $ 5 billion following the November 2018 investment from Constellation Brands but fell to just over CA $ 2 billion. Remember this CA $ 2 billion includes the CA $ 245 million from Constellation Brands made the guarantee earlier this year. Without this extra cash, Canopy could have burned two thirds of its cash in less than two years.
Regardless of brand name and cash, Canopy Growth should be avoided by investors.
Harvest Health & Entertainment
While US cannabis stocks are significantly higher in price compared to licensed Canadian manufacturers, not every US cannabis stockpile is worth your hard earned money. In November, vertically integrated multi-state operator (MSO) Harvest Health & Entertainment (OTC: HRVSF) is a name I recommend you avoid.
Around this time last year, I was really excited about Harvest Health’s future. It has implemented an acquisition-heavy strategy designed to push its distribution license number above 130 as well as expand its presence to more than a dozen states. The company also signed an agreement in June 2019 with the Asian American Trade Association Council (AATAC) to provide exclusive and wholesale cannabidiol (CBD) products to more than 10,000 convenience stores and gas stations. all over the country.
Sounds like a pretty solid growth plan, doesn’t it? Unfortunately, it has many difficulties.
For example, the CBD growth train completely derailed in the second half of 2019. The US Food and Drug Administration has decided not to allow CBD as an additive for food, beverages, and functional foods. This has limited applications for CBD. In other words, Harvest’s CBD deal with AATAC is not the game-changing factor investors are expecting.
Another problem is that Harvest Health has eaten off more than it could chew on the acquisition front. With the changing dynamics of the cannabis industry, Harvest was forced to cancel two acquisitions deals – Falcon International and Verano Holdings – and instead focus on spending cuts. Although revenue more than doubled in the second quarter, Harvest Health still lost $ 18.5 million. Compared to other major MSOs, it may be the ultimate vertically integrated operator that generates recurring returns.
While I don’t like Harvest Health, its valuation makes no sense to the extent to which the business still has to prove itself to Wall Street and its investors.
There is absolutely no stock list to avoid as the plague ever completes without Cannabis Aurora (NYSE: ACB) Get its timing in the spotlight.
Aurora is the most popular cannabis stock among investors every year, and as of May, it was the most held stock on online investment app Robinhood. The company’s push to become the world’s top cannabis producer, as well as access to two dozen markets outside of Canada, are expected to be insurmountable competitive advantages. But very few went according to plan.
Aurora Cannabis can blame Canadian regulators, which have delayed the launch of high-margin derivatives and were slow to approve crop and sales permits. Provincial regulators in Ontario, Canada’s most populous province, are also not doing better. A lottery system has now been abandoned to designate a distribution license that only brings 24 locations open on the one-year anniversary of legalizing the sale of weeds for adult use.
But falsifying everything about the regulators would be a mistake. Aurora Cannabis is an underperforming company that has lost about 96% of its value in the past 19 months. It has expanded capacity far beyond what’s needed in the country, struggled to generate substantial revenue outside of Canada, and burned its cash at an alarming rate. The company’s only answer to its capital concerns is to continue to issue common shares that drown the company’s shareholders.
Aurora Cannabis has also overpaid for all of its acquisitions. Most notably, the company paid CA $ 2.64 billion to acquire MedReleaf. Following the deal, Aurora closed MedReleaf’s Markham facility (7,000 kg of annual production) and sold the 1 million square foot Exeter greenhouse for CA $ 10.25 million. The final figure for the deal is 28,000 kg of annual cannabis production and exclusive brands.
This continues to be one of the worst cannabis stockpiles across North America, and it should be avoided like an epidemic.