Cannabis is likely to be one of the fastest-growing industries of the decade. According to New Frontier Data, legal weed sales in the U.S. are expected to grow by an annual average of 21%, ultimately hitting north of $41 billion by mid-decade. Meanwhile, the Canadian pot market is expected to see sales vault from $2.6 billion in 2020 to $6.4 billion by 2026, per BDSA…
While this sales growth will undoubtedly make some cannabis investors rich, we also know that not every marijuana stock can be a winner. The following trio of pot stocks stand out for all the wrong reasons and should be avoided like the plague in August.
Aurora Cannabis (NASDAQ:ACB) was once the most-held stock on online investing app Robinhood. It had 15 production facilities, was expected to peak at well north of 600,000 kilos of annual production, and sported a market cap of nearly $10 billion. Nowadays, it’s a regular resident of the pot stocks to avoid column.
Even though cannabis is treated as a traditional consumer good (i.e., demand is pretty steady, no matter how well or poorly the U.S. economy is performing), and Canadian weed revenue has been climbing, Aurora Cannabis’ fiscal third-quarter operating results were abysmal. Net cannabis sales plunge 21% from the prior-year period, with recreational weed revenue declining 53%. While the coronavirus pandemic took much of the blame, it’s tough to sweep a 53% sales drop under the rug when total pot sales for the country have been trending higher.
To be fair, Aurora Cannabis and its Canadian peers have been hurt by regulatory miscues at the federal and provincial level. For example, it took far too long for Ontario’s regulators to realize its dispensary lottery system wasn’t working. This led to supply bottlenecks that are still being worked out. But Aurora’s roughly one dozen grossly overpriced acquisition didn’t help its cause, either. Over the past two years, the company has written down in the neighborhood of half of its total assets.
Arguably the bigger issue for Aurora Cannabis is that it’s no closer to reaching profitability than it was at this time last year. Through the first nine months of fiscal 2021, Aurora posted an operating loss of $232.3 million Canadian ($186.2 million U.S.). That’s only an 18% reduction from the comparable nine-month period in fiscal 2020. The company’s management team has outlined numerous forecasts to reach positive earnings before interest, taxes, depreciation, and amortization (EBITDA), but none of these projections have come to fruition.
And if you need one more rock-solid reason to avoid Aurora Cannabis like the plague, take into account the company’s nonstop share-based dilution that’s been used to fund acquisitions and cover day-to-day operating expenses. Taking into account a 1-for-12 reverse split enacted in May 2020, Aurora’s share count has ballooned from 1.3 million shares in mid-2014 to about 198 million shares by March 31, 2021. Devoid of catalysts, Aurora Cannabis should be avoided by investors.
Another pot stock that should be given the cold shoulder by investors in August is Cronos Group (NASDAQ:CRON).
Like Aurora, Cronos is a Canadian weed stock that’s pretty popular with retail investors on Robinhood. But unlike Aurora, Cronos Group is well funded. That’s because it closed a deal in March 2019 to sell a 45% equity stake to Altria Group (NYSE:MO) for $1.8 billion. Altria is the U.S. tobacco company behind the premium tobacco brand Marlboro.
When the Altria deal closed over two years ago, the expectation was that Cronos would use this capital to push into the U.S., as well as work hand-in-hand with Altria to develop high-margin derivatives, such as vapes. With cigarette volume declining in the U.S., it’s been in…
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