Marijuana stocks moved higher after November’s U.S. elections on renewed hopes that federal legalization could become reality. Although legalization has happened in a patchwork manner on a state-by-state basis, federal action remains elusive.
Senate majority leader Chuck Schumer and other senators have stated that they will push legislation this year. Broader sentiment is that now is the tipping point to end federal prohibition. The cannabis sector had moved higher on such hopes.
Yet, marijuana stocks themselves have yet to uphold their promise of being the next ‘it’ sector. Revenues haven’t been as high as pundits predicted, and profitability has been elusive.
Since early February, the sector has lost that post-election momentum. The Global X Cannabis ETF (NASDAQ:POTX), with its 26 pot-stock portfolio, is down 41.7% since Feb. 10.
The result are cannabis names that could look enticing on price alone. However, more analysis is needed. Fortunately, we’ve done some of that for you, dear reader, on the following seven marijuana stocks:
- HEXO (NYSE:HEXO)
- Canopy Growth (NASDAQ:CGC)
- Tilray (NASDAQ:TLRY)
- Cronos Group (NASDAQ:CRON)
- Aurora Cannabis (NYSE:ACB)
- OrganiGram (NASDAQ:OGI)
- Sundial Growers (NASDAQ:SNDL)
Marijuana Stocks: HEXO (HEXO)
HEXO is arguably a company that marijuana investors might say deserves a better rap. After all the company has made some positive strides. In the three months that ended Oct. 31, 2019, the Canadian company racked up a net loss exceeding 60 million CAD (then $45.6 million). Fast forward a year later, and HEXO had nearly broken even. Its most-current net loss was a much more manageable 4.197 million CAD.
Yet, despite that fact, HEXO is still plagued by the same issue that haunts so many other operators in the marijuana industry: a lack of profits. The marijuana industry is still very nascent. However, HEXO is a company which has been operating in Canada since 2013. It remains in a state of limbo that is common in the marijuana sector: it’s ready to pop on prohibition news but it’s hampered by a lack of profits. As a result, analysts simply consider it a hold.
HEXO stock might look relatively cheap at around $7 per share. But the shares are underpinned by a return on equity of -84.55%. All of this indicates to me that even $7 per share is too expensive for HEXO stock.
Canopy Growth (CGC)
Canopy Growth is one of the biggest names in cannabis. But the Canadian company still looks to be overpriced. It is accelerating its U.S. strategy on optimism surrounding renewed hope around legalization.
However, analysts at Jefferies still chose to downgrade it following Canopy Growth’s revelation about the accelerated strategy. Part of their thinking was that while Canopy is best positioned among Canadian growers, U.S. operators are stronger.
Canopy Growth has the option to acquire Acreage Holdings which operates across multiple states. The option will be exercised if and when federal prohibition is lifted. The argument from Jefferies is that while this gives Canopy Growth direct U.S. exposure, it is not enough. The firm believes Canopy remains overvalued in either scenario due to the lack of profitability out of both companies.
Canopy Growth revealed that it anticipates profitability sometime in FY 2022. That can’t come soon enough as the company lost 829.3 million CAD in Q3.
Even though CGC stock has fallen 37% in the past three weeks there is little reason to buy the dip.
Tilray is a leader in the medical cannabis and hemp industry. The Canadian company has operations not only in Canada, but across the globe. Tilray has subsidiaries in Australia and New Zealand, Europe and in Latin America.
Tilray looks overpriced like the majority of the marijuana stocks. Profitability remains non-existent, so investors who scrutinize the company through profit metrics often come to the conclusion that it is indeed not worth its price. TLRY stock carries an ROE of -116.07% which ought to cause potential investors to think twice.
The company’s financial strength isn’t stellar either. Investors should ask always themselves whether the company behind a stock is value creating or value destroying. Based on the company’s trailing 12-month income statement, investors can expect Tilray to be value destroying. That’s because it has a weighted average cost of capital of 7.04% and an ROIC of -18.11%. Effectively that means $1 of capital costs Tilray $1.0704. Then, after the company invests that $1.0704 it realizes a return of 81.89 cents.
Tilray increased revenues and only lost $3 million in Q4 of 2020, as opposed to $219.8 million in Q4 2019. Although the company is still in the red, it deserves some credit. It will merge with Aphria (NASDAQ:APHA) soon, creating the world’s largest cannabis company by revenue.
Cronos Group (CRON)
Cronos Group stock has already come down significantly from the Feb. 10 highs that swept across the marijuana industry. CRON stock has dipped 30% in that period. It is another case of whether to buy the dip, or stay away. I still believe it is too expensive.
For one, Cronos Group has proven very unsteady over the past three years. In 2018 it recorded a net loss of $21.817 million, in 2019, a net income of $1.165 billion, and then a net loss of $75.27 million at year end 2020. Volatility is the norm in nascent industries. The marijuana industry is no different.
Cronos recorded a gross loss of $25.8 million in 2020 which was an increase of $8.2 million over 2019. Wall Street won’t be much of a help for investors considering whether to purchase CRON stock. The analysts covering the stock give it a “hold” rating. This phenomenon holds true across the marijuana industry by and large. Again, there’s an overarching feeling that the industry can explode, but results remain elusive.
The two buy ratings analysts had given CRON stock a few months ago are gone. Not that much has fundamentally changed for Cronos Group, but there is an overarching sentiment in the markets that marijuana stocks represent a bubble.
Aurora Cannabis (ACB)
Aurora Cannabis is a Canadian company that has seen some positives yet remains mired in the same problems plaguing the industry. The company’s most recent earnings press release paints a rosy picture, as press releases tend to do.
The company highlighted increasing revenues. It specifically highlighted rising medical cannabis revenues which jumped by 42% over the previous year’s period. And the company saw an increase in international medical sales of 562% in Q2 2021.
That said, Aurora Cannabis reported a net loss from continuing operations of $292.8 million. This led to an adjusted EBITDA loss of $16.8 million in the quarter. That’s down from a loss of $69.9 a year earlier during the same period.
Aurora Cannabis has poor profitability metrics. Operating margin, net margin, return on equity and return on assets are all in the negative. Further, Aurora Cannabis is value destroying in terms of capital use. Its return on invested capital is -10.84 % while its weighted average cost of capital is high at 20.79%.
OrganiGram is a company that has undergone a lot of turnover recently. That turnover related to its poor operations. The company recently replaced its SVP of operations. The company faces the double-edged sword of decreasing sales and an increasing cost of sales.
It cost the company 47% more to make sales in Q1 2021 compared to the previous year’s period. Unfortunately, OrganiGram also saw 11% fewer sales during that period. This in part due to its inventory issues.
OrganiGram is a company with operational issues that got pulled upward by recent excitement around marijuana stocks in early February. The fact is that it has problems and on closer inspection, investors should stay away.
There were indications that turnover could set the company in the right direction, but I believe OGI stock is one to clearly avoid. It still looks too expensive to me even at current prices.
Sundial Growers (SNDL)
Sundial Growers has seen a lot of price movement of late. In late January it traded below $1. It ended up rising to around $3 within a few weeks. Now it sits at $1.38. I believe it is too expensive even at this penny stock price. If the stock goes where I believe it should, it will fall below $1 and face listing issues again.
When I last wrote about Sundial Growers, I noted that “Through the first nine months of 2020 Sundial Growers did manage to sell a bit more. Revenue grew to $50.7 million CAD. That isn’t stellar, but improvement is improvement. Unfortunately, the losses really ballooned in 2020. That 2019 net loss of $126.54 million CAD grew to a whopping $175.8 million CAD.” The company has those same problems now.
The company has really serious inventory issues which make it problematic. It was one of the stocks caught up in Robinhood trading due to short interest in shares. There’s not much to like about SNDL, and I’d argue that it is too expensive even at current prices. This is a company that may not exist too long from now.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.