There’s simply no industry that’ll have investors seeing green quite like the marijuana industry. According to the duo of Arcview Market Research and BDS Analytics, the global weed industry is on track to grow by 38% in 2019 to $16.9 billion, with sales more than doubling between 2018 and 2022 to an estimated $31.3 billion. Consistent double-digit growth is hard to come by in the investment world, which is what makes the cannabis industry such a popular choice.
But investors are also acutely aware that not every pot stock can be a winner. Although market share remains fluid in the early going, there are telltale signs of worrisome valuations throughout the industry. Perhaps no marijuana stocks are more avoidable in April than the following three…
Trust me, I do understand the excitement surrounding Tilray (NASDAQ:TLRY). It’s had incredible success marketing its cannabis brands to Canada’s medical community, has landed two brand-name partnerships with Anheuser-Busch InBev and Novartis‘ generic-drug subsidiary Sandoz, and has close to 80% of its shares owned by private-equity fund Privateer Holdings. This lack of available float is what played a big role in pushing Tilray’s stock from a list price of $17 in mid-July to an intraday high of $300 two months later.
But any sane investors who read the company’s most recent operating results and listened to Tilray’s conference call with analysts are going to keep their distance.
For the quarter, Tilray recorded a meager $15.5 million in sales and managed only a 20% gross margin on that revenue. Even with an increase in higher-margin alternative products being sold, the company’s need to purchase weed from third-party providers (because its own production isn’t anywhere near that of its mid- and large-cap peers) wrecked its fourth-quarter margins. Altogether, operating losses tallied $22.9 million in the fourth quarter and $57.7 million for the full year. It’s unclear exactly when Tilray has a real shot at being profitable — and that’s a red flag.
Another genuine red flag is commentary from CEO Brendan Kennedy. To summarize, Kennedy noted that assets in Canada were overpriced, and that the company sees better investment opportunities in the U.S. and Europe. While the markets for both are larger than Canada over the long run, this strategy shift sounds more like a tap-out in Canada than a decision made from a position of strength.
With Tilray switching gears, producing sizable operating losses, and trailing its peers by a mile in the production department, it becomes a bona fide marijuana stock to avoid in April.
Another pot stock that’s a regular on the “avoid like the plague” list is drugmaker Insys Therapeutics (NASDAQ:INSY). Insys has been a mess for years, yet it somehow keeps digging itself an ever-deepening hole.
The front-and-center issue for Insys is that…
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