There’s a very good chance that legal cannabis could be one of the decade’s most impressive growth trends. According to New Frontier Data, the U.S. weed market is on track to grow by an annualized average of…
21% through 2025. This would place annual pot sales at north of $41 billion by mid-decade. Meanwhile, cannabis-focused analytics company BDSA expects Canadian weed sales to more than double from $2.6 billion to $6.4 billion between 2020 and 2026. There’s plenty of room in these robust growth projections for certain marijuana stocks to thrive.
However, not all pot stocks are going to be winners. Among the veritable sea of fast-growing cannabis stocks are three that should be avoided like the plague in September.
Sundial Growers
In March, I effectively referred to Sundial Growers (NASDAQ:SNDL) as the worst cannabis stock money could buy. Even with the company’s share price being halved since that declaration, I still believe Sundial is one of the worst ways to put your money to work in the cannabis space.
Sundial has one thing going for it: cash. Management turned on the capital-raising faucet in October 2020 and hasn’t shut the valve off since. As of early August, the company was sitting on approximately 1.2 billion Canadian dollars ($953 million) in cash, marketable securities, and long-term investments. With no debt, the concerns of bankruptcy are long gone. Unfortunately, this bountiful cash pile is where the good news ends.
The only way Sundial has been able to raise capital is buy issuing stock — a lot of stock. In the nine months between Sept. 30, 2020 and June 30, 2020, Sundial’s share count ballooned from 509 million to 2 billion. All the while, longtime shareholders have been pummeled by this incessant dilution. With the company’s share price stuck below $1, a reverse split will potentially be necessary to avoid delisting from the Nasdaq exchange.
What makes this ongoing capital-raising activity especially maddening is that management isn’t exactly certain what it’s going to do with all of this cash. It’s made an acquisition and has sort of become a cannabis-focused special purpose acquisition company. But continuing to raise cash without any concrete plan is a slap in the face to the company’s shareholders.
If you need another good reason to avoid Sundial, consider that its sales have headed in reverse as Canadian weed revenue expands. Switching from wholesale to retail meant rebuilding its business from the ground up. Through the first half of 2021, Sundial has generated only $19.5 million in gross cannabis revenue, which is down 40% from the comparable year-ago period.
With the exception of its cash, Sundial has nothing going for it.
Hexo
Another Canadian pot stock that’s absolutely raking its shareholders over the coals and deserves to be avoided like the plague is Quebec-based Hexo (NASDAQ:HEXO).
When Canada legalized recreational marijuana in October 2018, I truly thought Hexo was going to be a winner. The company had formed a joint venture (known as Truss) with Molson Coors Beverage to create a line of cannabinoid-infused beverages. It also secured a five-year wholesale agreement for an aggregate of 200,000 kilos of cannabis from its home province of Quebec. However, time has shown that nothing is a given in the investment world.
Aside from federal and provincial-level regulatory miscues that have delayed the opening of dispensaries in key Canadian provinces (ahem, Ontario), Hexo’s biggest issue has been its acquisition-happy management team. For example, Hexo grossly overpaid for its Newstrike Brands buyout in 2019. While this purchase was designed to expand its production capacity, this added output was never necessary. Eventually, Newstrike’s cultivation facility was sold for pennies on the dollar and Hexo took a significant writedown.
What’s Hexo done in the two years since this…
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