Given recent news items regarding the federal legalization of cannabis, you may think now is the time to be thinking about which cannabis stocks to buy, not which cannabis stocks to sell.
Yes, the release of a letter from the U.S. Department of Health and Human Services, recommending that marijuana be rescheduled as a Schedule III drug, may be seen as signs of marijuana legalization progress. However, there is still a high level of uncertainty over when (or if) federal-level marijuana laws are reformed.
There is currently widespread support for marijuana legalization (70%). With a majority of Republicans supporting it, pot reform is arguably ceasing to be a partisan issue. 38 U.S. states have legalized marijuana for recreational and/or medicinal use.
Still, efforts to push for cannabis reform in Congress have gone nowhere. The Biden Administration has been seeking to loosen federal restrictions, but these efforts are of little help to the legalized cannabis industry. To enable access to banking services, and to enable Canadian cannabis companies to enter the U.S. market, changes to the laws are necessary.
As this remains up in the air, these are the seven cannabis stocks to sell.
Aurora Cannabis (ACB)
While U.S. federal cannabis legalization remains a work-in-progress, Canada-based cannabis companies like Aurora Cannabis (NASDAQ:ACB) have had to contend with excess capacity.
However, as a Seeking Alpha commentator discussed back in September, the company has found an interesting way to put this capacity to productive use.
Aurora has diversified into the cultivation of vegetables and orchids. This move, plus other restructuring and turnaround efforts, have resulted in improved financials, including a possible swing to positive free cash flow this year.
Despite these positives, however, negatives like dilutive equity raises have outweighed them, resulting in a nearly 60% drop in the price of ACB over the past twelve months.
With further improvements to profitability likely not sufficient to justify Aurora’s $183 million, coupled with continued impatience about the opening up of the U.S. legal cannabis market, ACB may continue to be a poor performer.
Canopy Growth (CGC)
During both the late-2010s pot stocks wave, as well as during the shorter-live second wave of popularity right after the 2020 U.S. Presidential election, Canopy Growth (NASDAQ:CGC) was one of the more popular stocks in the cannabis space out there.
However, since the fading of that most recent wave, CGC stock has been one of the top cannabis stocks to sell. During this time frame, shares in the Canada-based integrated cannabis company have declined from split-adjusted prices north of $400 per share, to around $4.65 per share today.
Despite this nearly 99% price decline, CGC could keep dropping. The company remains chronically cash-crunched.
Scrambling to stay afloat through dilutive private placements, barring sudden progress with U.S. legalization, expect the stock’s poor performance to carry on. With more shareholder value likely to go up in smoke, the only takeaway is to stay away.
Cronos Group (CRON)
Cronos Group (NASDAQ:CRON) is another Canada-based cannabis company looking to get into the U.S. market, contending with poor results in the meantime. Yes, on the surface, it may appear that Cronos’ financial performance is improving.
For Q3 2023, the company reported a material improvement in its profitability. Whereas Cronos reported net losses of 9 cents per share in Q3 2022, during Q3 2023 the company essentially broke even, reporting earnings per share (or EPS) of zero. Take a closer look, however, and it’s clear that CRON stock isn’t the successful turnaround story it may seem like on the surface.
A major factor in Cronos’ narrowing losses was a big increase in interest income, plus a foreign currency transaction gain. If interest rates move lower, and if there are fewer onetime gains like the one reported last quarter, future results for Cronos Group may be far less impressive.
GrowGeneration (GRWG)
In contrast to the three cannabis stocks to sell listed above, GrowGeneration (NASDAQ:GRWG) is more of an indirect wager on the marijuana legalization growth trend.
Yet while this retailer of hydroponic and other pot cultivation equipment may be less dependent on federal changes for its prosperity, as InvestorPlace’s Jeremy Flint pointed out in November, GrowGeneration is not without its headwinds.
Namely, the company is dealing with the same issues other bricks-and-mortar retail stores are dealing with: lower demand coupled with the impact of high inflation on operating expenses. Both these factors have negatively affected operating performance.
GRWG stock has fallen considerably (45.9%) over the past twelve months.
Turnaround efforts (like store closures) notwithstanding, with sell-side earnings forecasts calling for another year of declining revenue and heavy losses, GRWG appears poised to perform poorly once again in 2024, making it wise to steer clear.
OrganiGram Holdings (OGI)
Toronto-based OrganiGram Holdings (NASDAQ:OGI) is (you guessed it) yet another Canada-based cannabis firm struggling to attain profitability.
Granted, outside of the aforementioned legalization news, there has been another, more company-specific development with this pot play in recent months.
Back in November, leading tobacco company British American Tobacco (NYSE:BTI) purchased newly issued shares of OGI stock worth CAD$124.6 million ($91.3 million USD), in a private placement offering. I can understand why the market reacted positively to this news.
With this capital infusion, the company plans to make bolt-on acquisitions of other cannabis companies at today’s bargain basement prices. Given how consolidation efforts for other cannabis firms (including many of the names listed above and below), it’s hard to see this being the “secret sauce” that enables OGI to prosper, while comparable names continue to flounder because of U.S. legalization delays.
SNDL (SNDL)
Just like CGC, SNDL (NASDAQ:SNDL) is another pot play that at one time was very popular among retail traders, but ever since its heyday has been one of the cannabis stocks to sell.
The Canada-based cannabis company raised a significant sum during the last pot stocks boom. Admittedly, not all of it went up in smoke.
During this time, SNDL has diversified into the liquor retail business. It has also made debt and equity investments into other cannabis companies. Nevertheless, there’s a good reason why SNDL stock (trading for around $1.40 per share today) trades at a massive discount to its tangible book value ($3.05 per share).
Even with a strong asset base, SNDL has so far still failed to generate much in the way of earnings from these assets. Until this happens, SNDL’s valuation discount may persist, making this seemingly-cheap cannabis stock a potential value trap.
Tilray Brands (TLRY)
Like many of its peers, Tilray Brands (NASDAQ:TLRY) is pursuing diversification in order to improve fiscal performance. As you may know, Canada-based Tilray has been growing its beverage business via acquisitions.
Last year, the company bought Molson Coors’ (NYSE:TAP) 57.5% stake in infused beverage venture Truss.
Tilray also acquired several beer and alcoholic beverage brands from Anheuser-Busch Inbev (NYSE:BUD). While some investors may like how building up the stateside beverage unit could help aid any move into the U.S. cannabis market once federal laws change, most have grown impatient.
At least, that’s what we can gather from TLRY’s performance since the deals were announced last August. Initially popping on the news, shares have since coughed back these gains.
Even as Tilray could narrow losses/swing to profitability thanks to its beverage diversification, it may not be enough to sustain TLRY’s current valuation ($1.48 billion).
On the date of publication, Thomas Niel did not hold (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.
