Believe it or not, marijuana stocks proved fallible in April, with the first tradable cannabis exchange-traded fund, the Horizons Marijuana Life Sciences ETF, falling by 1.6% during the month. Of course, there’s no need to cry a river, with the ETF tripling the performance of the S&P 500 on a year-to-date basis.
However, a budding cannabis market doesn’t mean you can simply throw a dart and select a winner. If anything, investors should be more critical of pot stocks now, with the industry still nascent and contending with numerous supply chain-based growing pains.
As I look at the more than 50 marijuana stocks I regularly follow, I see three that should be avoided like the plague in May…
The first pot stock that I’d suggest avoiding this month is, you know, only the largest marijuana stock in the world by market cap: Canopy Growth (NYSE:CGC).
Shares of Canopy Growth had a terrific April after receiving an upgrade from GMP Securities to buy, as well as announcing the $3.4 billion cash-and-stock acquisition of vertically integrated dispensary operator Acreage Holdings (NASDAQOTH:ACRGF), which is contingent on the U.S. federal government legalizing weed. Wall Street views Canopy’s contingent deal to acquire Acreage as a means to enter the U.S. market on the relative cheap with momentum in the U.S. building. Acreage has licenses for retail, cultivation, or processing facilities in 20 states, assuming all pending acquisitions close.
As for me, I’m not too thrilled with Canopy Growth’s near-term outlook. To offer another side to the above deal, there are zero assurances that the U.S. federal government will change its tune on cannabis. Republicans still control the Senate and Oval Office, and they’ve been historically more negative on the pot movement than Democrats or Independents — not to mention that legalizing marijuana would have negative tax implications for the federal government, which is something most folks tends to overlook. In short, there’s nothing that convinces me that Acreage is going to be acquired by Canopy.
Canopy Growth is also at the forefront of Canada’s massive supply chain problems. Health Canada has been slow to approve cultivation licenses and sales permits; packaging solutions have kept raw cannabis awaiting processing sitting on the sidelines; and growers are still ramping up capacity. In January and February, cannabis store revenue fell in Canada, portending what should be a challenging quarter for most pot stocks. But it’ll be especially rough for those companies most tied to the recreational market, such as Canopy Growth, which recognized almost 80% of total cannabis revenue from the adult-use market.
With losses expected to continue through fiscal 2020, I’m not finding any value to squeeze out of this $17 billion pot stock.
In terms of accounting red flags, TILT Holdings (NASDAQOTH:SVVTF) may have the most apropos company name.
TILT began trading in Canada on Dec. 6, 2018, after completing a reverse merger of four businesses. These businesses include a vertically integrated dispensary operator in Massachusetts, a Canadian grower that’s applied for a cultivation license, a cannabis-delivery software company, and a company focused on customer-relationship management software.
As you might imagine…
Continue reading at THE MOTLEY FOOL