Though most investors are laser-focused on tech stocks, it’s actually cannabis that could be one of the greatest growth trends of the 2020s. According to New Frontier Data, the U.S. pot industry is expected to average an annual growth rate of 21% between 2019 and 2025, ultimately hitting more than…
$41 billion in sales by mid-decade. Meanwhile, BDSA anticipates Canadian pot sales will more than double from $2.6 billion to $6.4 billion between 2020 and 2026. And let’s not forget that Mexico is on the cusp of recreational legalization. All told, North America could become a $50 billion weed market by the midpoint of the decade. That’s an investment opportunity not to be ignored.
However, history also tells us that not every company in a next-big-thing industry will be a winner. As the marijuana industry has matured, the line between the haves and have-nots have become more discernable.
As move into May, the following three pot stocks stand out as those that should be avoided like the plague.
Sundial Growers
Since the inclusion of Canadian licensed producer Sundial Growers (NASDAQ:SNDL) on April’s “avoid like the plague” list, its shares have declined by another 22% and dipped below the $1 minimum listing requirement to remain on the Nasdaq exchange. Even now, with the company close to 80% below its intraday highs set earlier this year, it’s still grossly overvalued given how little it’s shown to Wall Street and investors.
Part of the problem for Sundial is that the Canadian rollout of legal cannabis has been a disaster. Health Canada delayed approving cultivation and sales licenses, and pushed back the launch of higher-margin derivatives, such as edibles and vapes, by a couple of months. Meanwhile, provincial regulators in key provinces like Ontario have struggled to approve dispensary licenses in a timely manner.
However, most of the weight of Sundial’s poor performance falls on the shoulders of the company’s management team. Wanting to pay down the company’s debt, Sundial’s management team began drowning existing shareholders in common stock issuances, debt-to-equity swaps, and warrants in the fourth quarter of 2020. In a five month stretch (Oct. 1, 2020 – Feb. 28, 2021), Sundial’s outstanding share count rose by 1.15 billion.
Guess what? Sundial’s management team still isn’t done drowning its shareholders in dilution. In March, the company filed a prospectus that could see up to $800 million in additonal capital raised via at-the-market offerings. Based on Friday’s close, this could add up to 926 million more shares. Sundial might be sitting on a large cash pile, but the company’s management team has no concrete plans for it.
And if you needed one more solid reason to avoid Sundial Growers, consider that the company abandoned its wholesale operating model in favor of a higher-margin retail model. This transition has led to substantial year-over-year sales declines and some unsightly writedowns. I don’t mince words when I say that Sundial is the worst marijuana stock your money can buy.
HEXO
The second marijuana stock to avoid like the plague in May is yet another Canadian licensed producer, HEXO (NYSE:HEXO).
Unlike Sundial, HEXO has been able to put together some reasonably positive operating developments of late. The company’s fiscal second-quarter operating results, ended Jan. 31, 2021, showed adult-use net sales rose 10.5%, along with the company eking out positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). A lot of key metrics showed improvement from the prior-year period and the sequential quarter.
So, why avoid HEXO? To begin with, it’s drowning its shareholders in dilution much the same way Sundial is, albeit to a lesser degree. Following multiple at-the-market offerings HEXO’s share count more than doubled between mid-2019 and the end of 2020. Things could get…
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