3 cannabis stocks to avoid right now

IIf the government could simply move away from marijuana, it could realize its full potential as a massive growth opportunity. Unfortunately, a state-level fiscal and regulatory quagmire, coupled with its continued classification as an illegal substance at the federal level, has put obstacles in the way of otherwise good pot stocks.

Other cannabis stocks, however, appear to be doing all they can to sabotage themselves and their investors. Canopy growth (NASDAQ: CGC), Charlotte Web Holdings (OTC: CWBHF), and Aurora Cannabis (NASDAQ: ACB) should be avoided because of the self-inflicted injuries that hold them back.

Image source: Getty Images.

Oh, Canada

Eric Volkman (Canopy Growth): I think Canopy Growth is not just a stock to be avoided now, but it is likely to be avoided in the future.

Since the entry in 2018 of a strategic partner (and with deep pockets), the alcohol company Constellation brands (NYSE: STZ), Canopy Growth was considered one of the incumbents in the sector. But brand awareness and a dedicated investor aren’t necessarily a good brand of stocks.

Canopy Growth is a poster child for the generally loss-making marijuana industry, with consistent annual net deficits that have grown worryingly in recent times.

A total of 1.74 billion Canadian dollars ($ 1.37 billion) was the damage for the year 2020, which frightened even the robust investors who suffered the loss of more than 1.3 billion dollars. CA ($ 1 billion) in 2019. This, in turn, was almost double the shortfall of C $ 736 million ($ 579 million) in 2018.

Canopy Growth spends a lot of money on asset purchases, trying to expand its product line, expand its network and gain market share.

A handful of acquisitions (the latest being Canadian quality producer Supreme) have certainly strengthened it and kept it relevant in its home market. Despite this, it still managed to post sequential revenue declines in its last two published quarters. Many were impressed that Canopy Growth posted a rare and apparently quite substantial net income of C $ 390 million ($ 307 million) in the more recent of these two periods (the first quarter of the fiscal year). 2022). However, delving into the earnings literature, we see that this was due to what the company said to be “Other income totaling $ 581 million in the first quarter of 2022, mainly due to changes in non-cash fair value. of [CA]$ 601 million. “

Changes in fair value are essentially accounting adjustments based on how a business measures its inventory and costs to sell. This is a feature of International Financial Reporting Standards (IFRS) that a few Canadian marijuana companies use, and these estimates are not necessarily believed to be accurate. So that nine-figure profit may not be all it’s meant to be, to put it tactfully.

Finally, Canadian pot companies as a group have fallen out of favor among investors alongside their American counterparts.

It’s reasonable. The US market is much larger, it is not maturing like Canada (which rocked the crucial first step of legalizing recreational marijuana nationwide in 2018) and, for the foreseeable future , it is closed to direct Canadian exports (the drug is still technically illegal federally, after all). The companies that will make the real leap into the American market will most likely be American operators.

CBD oils and marijuana leaf

Image source: Getty Images.

This stock of CBD is not what it used to be

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

On that note, Charlotte’s Web makes a handful of wellness products for humans and pets, all of which contain cannabidiol (CBD), a chemical derived from cannabis. While typical cannabis products can be intoxicating, CBD is not, and proponents claim it has beneficial effects, such as reducing anxiety. The CBD market is therefore not the same as the booming markets for medicinal and recreational cannabis, although there is likely to be some overlap.

According to the company’s latest earnings report, second-quarter revenue grew only 11.4 percent year-on-year to $ 24.2 million, which is far too low for a relatively small business that investors might be looking for robust growth. And quarterly revenues appear to have stagnated after 2019, when they brought in $ 25 million in the second quarter.

In addition to this slowdown in demand, profitability has remained elusive for the past two years. This was undoubtedly caused by the sharp increase in Charlotte’s Web’s cost of goods sold (COGS) and its selling, general and administrative (SG&A) expenses since 2018. At least part of the increase in SG&A expenses stems from the growth of its marketing channels and spending to maintain and expand its leading market share in several distribution segments. In 2020, Charlotte’s Web was CBD’s largest outright competitor in e-commerce, grocery stores, drugstores, natural specialty retail, and mass distribution.

Yet being the leader in these segments of the CBD market has not led to significant revenue growth or significant returns for investors in recent years. Investors should therefore avoid this stock until management demonstrates that the company’s primary market share is genuinely beneficial to shareholders.

Yellowing cannabis leaf

Image source: Getty Images.

Quality control issues

Rich Duprey (Aurora Cannabis): While Aurora Cannabis remains one of the most widely held shares on the Robinhood platform (it is currently 14th), that does not guarantee investor loyalty to the company.

Sales in the last quarter fell 21% from a year ago, but the consumer segment fell by half. While the Canadian government is more zealous in ordering widespread lockdowns beyond what we see in the United States in a bid to tackle COVID-19, Aurora has exacerbated the situation by embarking on a wave of acquisitions in which he overpaid for production and distribution capacities.

He has since noted a large portion of these costs. In many cases, this is because he hasn’t been able to get the kind of premium flower that his growth strategy needs, especially at Sky, which was going to be his flagship greenhouse. Today, Sky is only operating at 25% capacity as it continues to troubleshoot there.

Equally worrying has been Aurora’s desire to dilute its existing shareholders to continually raise cash. In May, he announced a new plan to sell up to $ 300 million in shares as part of a market offer, and although such sales allowed the pot stock to redeem one of its credit facilities, it still has some $ 300 million left. in long-term debt. To his credit, he has $ 525 million in cash. So while he should be positioned for growth, his internal hiccups continue to drag him down.

The stock is down 20% year-to-date, but has lost nearly two-thirds of its value from highs reached earlier this year. There may very well be a time when Aurora is a buy, but it’s not now, and investors should avoid the action. He has to prove that he can consistently get the kind of high-quality output from all of his facilities so that his goal of being a premium producer can be achieved.

10 stocks we prefer over Aurora Cannabis Inc.
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Alex Carchidi has no position in the stocks mentioned. Eric Volkman has no position in the stocks mentioned. Rich Duprey has no position in the stocks mentioned. The Motley Fool owns stock and recommends the Charlotte’s Web Holdings and Constellation brands. The Motley Fool recommends Charlotte’s Web. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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