Though investors’ eyes are squarely on tech stocks, it’s marijuana that could be one of the fastest-growing industries in North America over the next decade…
The latest edition of Marijuana Business Factbook from Marijuana Business Daily forecasts that legal weed sales in the U.S. could potentially triple to as much as $37 billion by 2024. With more U.S. states giving the green light to recreational and medical cannabis every year, and the Canadian industry working out its kinks, the sky’s the limit for North American pot stocks — well, most of them at least.
Even the fastest-growing industries have laggards that should be avoided at all costs by investors. In November, there are three pot stocks that cannabis stock investors would be wise to steer clear of.
Canopy Growth
First up is Canopy Growth (NYSE:CGC), the largest pure-play marijuana stock by market cap.
There’s a lot that investors seem to like about Canopy. For instance, it has the largest cash pile of any pure-play pot stock, and spirits giant Constellation Brands (NYSE:STZ) owns a nearly 38% stake in the company. This cash pile acts as something of a downside buffer for Canopy’s share price, while Constellation serves as an invaluable (and vested) partner in its future.
However, any positives that investors can come up with for Canopy Growth will take a backseat to three sizable negative catalysts.
To begin with, Canopy Growth, like its Canadian licensed peers, is having to head-to-head with low-priced illicit cannabis from the black market. A combination of having to delay the launch of higher-margin derivatives, coupled with the strength of value cannabis, means Canopy Growth’s margins are sinking.
Second, the company is losing money hand over fist. Even after shuttering 3 million square feet of licensed indoor cultivation, passing on the opening of the Niagara-on-the-Lake facility, laying off workers, and substantially cutting back on share-based compensation, Canopy Growth still lost $108.5 million Canadian dollars in the fiscal first quarter (ended June 30). It should be noted that even with substantive share-based compensation cuts, this expense still accounted for close to CA$31 million in first-quarter 2021 costs. According to Wall Street, it could be another four years before the company pushes into the profit column.
Third, the company’s cash buffer isn’t as safe as you might think. This cash pile stood at close to CA$5 billion following a November 2018 investment from Constellation Brands but has been whittled down to a little over CA$2 billion. Keep in mind this CA$2 billion includes CA$245 million from Constellation Brands exercising warrants earlier this year. Without this extra cash, Canopy would have burned through two-thirds of its cash in under two years.
In spite of its brand name and cash pile, Canopy Growth should be avoided by investors.
Harvest Health & Recreation
Although U.S. pot stocks offer considerably more upside than Canadian licensed producers, not every U.S. marijuana stock is worth your hard-earned money. In November, vertically integrated multistate operator (MSO) Harvest Health & Recreation (OTC:HRVSF) is a name I’d suggest avoiding.
Around this time last year, I was actually very excited for the future of Harvest Health. It was taking an acquisition-heavy strategy that was designed to push its dispensary license count above 130 as well as extend its presence into more than a dozen states. The company also…
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