Despite the doubling, these cannabis stocks are bad news
If you think the stock market has been splurging lately, take a look at marijuana stocks over the past three years.
Until the end of the first quarter of 2019, pot stocks were virtually unstoppable. Promises of increased capacity, partnerships and high margin derivatives fueled the rise, with Wall Street appearing blind to the potential of growing competition. It was not uncommon that cannabis stocks have delivered three- or four-figure earnings to their shareholders.
Then reality sank in April 2019. Over the next 12 months, ending March 31, 2020, the vast majority of cannabis stocks decreased from 50% to 90%. Supply issues in some Canadian provinces, high tax rates on legal products in the United States, funding issues across North America, and even the 2019 coronavirus disease pandemic (COVID-19 ) have devastated the industry.
However, pot stocks have found new life again since the broad market hit its low on March 23. Some of these bounces make perfect sense, as in the case of Trulieve Cannabis and Innovative industrial properties, which are two of the most profitable pot stocks on the planet. But some cannabis stocks, despite the doubling in price, remain bad news for investors and should be avoided at all costs.
As if it wasn’t already a stock of polarizing cannabis, Aurora Cannabis (NASDAQ: ACB) is attracting all kinds of attention after rallying 127% in the past month, over the past weekend. Aurora’s third-quarter fiscal year operating results served as a catalyst for the upswing, with the company reporting reduced cash consumption, better-than-expected sales and confidence in the that the company will achieve positive Adjusted EBITDA in the first quarter of fiscal 2021 (ended September 30, 2020).
But there is a real laundry list of things dislike the most popular pot stock among millennial investors. For example, the company that was once touted as the world’s largest producer of weeds is now trying to cut operating expenses. This has meant more than halving its peak production potential and laying off workers, while getting virtually no traction on overseas sales.
Additionally, Aurora Cannabis is what investors might call a serial diluter. Aurora has funded almost every aspect of its growth process by issuing or selling its shares. In light of the recently enacted 1-for-12 reverse split that prevented Aurora from being delisted from the New York Stock Exchange, its number of outstanding shares fell from around 1.3 million shares in June 2014 to may – to be 113 million shares six years later. And Aurora is not finished – he has a Market offer of $ 350 million at its disposal to issue additional shares in order to raise capital.
Investors who dig into Aurora Cannabis meat and potatoes will also find a lousy track record. More than half of the company’s total assets are classified as goodwill, an indication that it has largely overpaid for its many acquisitions. Between increasing inventory levels and inactive facilities, I am of the opinion that more than half of Aurora’s total assets may need to be impaired. This makes this stock a stock that investors should rightly avoid.
Another seemingly unstoppable cannabis stock in recent times is Tilray (NASDAQ: TLRY). Over the past three months, Tilray has climbed 109%. Like Aurora, Tilray’s recently completed quarterly results fueled these strong gains. The British Columbia-based licensed producer saw 126% year-over-year sales growth, a 16% reduction in sequential quarterly losses and more than tripled its overseas medical marijuana sales compared to the period of the previous year.
But these figures do not mask the great disappointment of Tilray since his astronomical post-IPO race in September 2018. Management has made it clear that it prefers to focus on markets outside of Canada. However, change company strategy Just six months after cannabis sales began in Canada, it hasn’t really worked. Large capital expenditures beyond Canada emptied Tilray’s once swollen coffers and sent it to seek capital.
In addition to lacking a clear strategy, Tilray’s foray into the United States, through its acquisition of Manitoba Harvest, has not worked very well. Manitoba’s hemp food operations have a considerably lower margin than Tilray’s cannabis operations. Additionally, cannabidiol (CBD) did not take off as expected in the United States after the U.S. Food and Drug Administration stepped up to use CBD as an additive to foods and beverages. So a large portion of Tilray’s annual earnings come from a low-margin hemp feed business.
Recently, the company’s cash flow remains precarious, even after a huge capital increase at the height of the coronavirus liquidation. Having $ 174 million in cash and cash equivalents might sound like a lot, but Tilray lost $ 71.3 million on an operating basis in the most recent quarter. This money is not going to last long with the way Tilray is losing money.
True to the Canadian theme, licensed Quebec producer HEXO (NASDAQ: HEXO) has also been on fire lately. Over the past month, which ended last week, the HEXO share price rose 128%. As with its peers, HEXO’s rapid rise can be attributed to its latest earnings report, which in its case featured better than expected revenues and reduced operating expenses for the company.
But like Aurora and Tilray, HEXO is its own form of train wreck. This is a company that has permanently closed its Niagara plant, acquired during the acquisition of Newstrike Brands last year, and is now looking to sell Niagara to raise capital. HEXO has also reduced production at its main plant in Gatineau and workers made redundant to conserve capital. Essentially, this is yet another licensed producer that is shrinking in an effort to just survive.
CEO Sébastien St-Louis’ comment at the end of last year provides another cause for concern. St. Louis, speaking with Wall Street analysts following the release of the company’s operating results, noted that HEXO would need to acquire 20% market share in Canada simply to move to recurring profitability. Even after signing the largest provincial wholesale agreement in 2018 with Quebec, HEXO is unable to swallow market share, let alone 20% of the cannabis market share in Canada.
With HEXO issuing shares via market offerings and continuing to dilute its shareholders, there is simply no reason for investors to be excited about these cannabis shares.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.