The cannabis market has been marred by long swings of optimism and even longer swings of underwhelming results. Investors in the space have been burned time and again by stocks that promise massive returns from the fledgling sector that continues to draw hope from a patchwork of legal regulations. The hope continues to be that once cannabis is fully legalized, profitability will result. Many investors are now worried that there are overvalued cannabis stocks in their portfolio.
My contention is that the cannabis stocks to invest in are those that are already there. They are few and far between but that’s simply the nature of the sector: There are a lot of losers currently. Don’t buy into them based on a promised turnaround in the future. Sell or avoid them altogether.
Tilray (NASDAQ:TLRY) has been a massive but for almost all of its life as a publicly traded stock. The firm IPO’d back in July of 2018 around $19 and fell almost immediately. It then slowly faded into penny stock territory only enjoying a brief resurgence during the onset of the pandemic. Then it broke a bunch more hearts in early 2021 and hasn’t stopped since.
The company’s shares are currently worth less than $2. I don’t think they’re a bargain even at those depressed levels. Tilray is simply a massive, writhing behemoth that cannot find a way to make money despite making massive moves over the past few years.
In 2020, management decided that scale was the answer to its issues. It purchased Aphria, creating the largest cannabis firm globally. Cannabis firms notoriously lost massive sums of money during that period with Tilray among the worst offenders.
In 2022, management then decided that diversification was the key to a turnaround. Tilrsy purchased Sweetwater Brewing. It’s not having the desired effect: Revenues are up moderately but gross profits are falling. Operating losses are growing and net losses are massive. Tilray is going to go down as the poster boy of cannabis excess and overzealousness.
There’s an argument to be made that SNDL (NASDAQ:SNDL) isn’t even a cannabis stock anymore. The company is simply a firm that used to be a cannabis firm, couldn’t make it work, bought an alcohol brand, rebranded and is now primarily an alcohol stock.
Today that firm is known as SNDL. Before July of 2022 it was known as Sundial Growers. Then it was a weed company but it decided that it couldn’t keep losing money indefinitely. So, it purchased Alcanna giving it 170 liquor stores. The thought was that Alcanna would provide crossover sales channels and complimentary products that its customer base would appreciate.
Today it’s primarily a liquor retailer with cannabis sales supplementing its operations. $151.7 million of its $244 million in sales came from liquor. It’s still losing a lot of money regardless. Like Tilray, alcohol sales can’t make up the profitability gap for SNDL. Don’t put your capital behind SNDL as it searches for a way to make money. Avoid this and the other overvalued cannabis stocks.
Aurora Cannabis (ACB)
Aurora Cannabis (NASDAQ:ACB) is headed toward zero. The only hope investors should have is that ACB shares are so cheap that they can produce meaningful returns quickly by rising a few cents in value. i.e., they hold potential for traders but few others.
Fundamentally, Aurora Cannabis is just another failed cannabis firm forced to address its lack of profitability at the moment. That pivot to more conservative operations has produced some tangible results including a net loss that narrowed from $87 million to $28 million between Q1 and Q2. Investors should also note that Aurora Cannabis also lost $618 million in Q2 ‘22. It has roughly $156 million in debt currently. That’s the result of running deficits for a long time. It’s also a primary reason to avoid Aurora Cannabis and other firms like it. They consistently lost money ad a pivot to fiscal responsibility driven by quantitative tightening is relatively meaningless overall. This stock easily earns its spot on our list of overvalued cannabis stocks.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.