2 Pot Stocks to Avoid Like the Plague in Q4

The global legal marijuana market size was valued at $9.1 billion in 2020 and is forecast to expand at a compound annual growth rate (CAGR) of 26.7% from 2021 to 2028.

Two of the companies operating in this booming market are Aurora Cannabis Inc. (ACB) and Cronos Group Inc. (CRON). Both stocks have fallen this year, due to their poor fundamental picture.

Today, I will analyze these two companies and identify the key risks as to why I believe investors should avoid them in the final quarter of the year.

Aurora Cannabis Inc. (ACB)

ACB is a Canada-based medical cannabis company, focused on the production, distribution, and sale of cannabis in Canada and internationally. Its cannabis products are used in the global medical cannabis market, global hemp-derived cannabidiol (CBD) markets, and in the consumer use cannabis market. 

ACB offers varieties of cannabis-infused products under various brands that include Aurora, Aurora Drift, San Rafael ’71, Daily Special, AltaVie, MedReleaf, CanniMed, Whistler, and ROAR Sports. Its products portfolio includes dried cannabis, cannabis oil, soft-gels, oral dissolve strips, edibles, vaporizers, and cannabis-infused chocolates.

The company lost 12.2% of its market capitalization since the beginning of the year, underperforming its benchmark, the ETFMG Alternative Harvest ETF (MJ), which is mostly flat year-to-date, down 0.3%.

While the financial metrics of the group have increased steadily over the past year, ACB is expected to experience a decline of its top-line growth in 2021, down 12.2% year-to-date to CAD 245m. However, this figure is expected to accelerate back to its double-digit growth pattern in the next two years, up 11.8% to CAD 274m in 2022 and up 20.4% to CAD 330m in 2023.

In terms of bottom line, ACB posted a massive loss of CAD 3.3b in 2020, after it incurred a massive goodwill impairment of CAD 2.54b, due to its numerous acquisitions in the marijuana space. Nevertheless, the net loss is estimated to decelerate in 2021 to CAD 695m and should continue on this path, down to $144m in 2022. This should continue to weigh on its stock price, given that the management has announced multiple times in the past that it is close to reaching its breakeven point.

With ACB’s unprofitable business, the company had to raise capital this year, issuing 84.8k new shares which boosted its cash position to $219m versus net debt of $369m in 2020. This has contributed to the bearish momentum of the stock and should continue to do so given the poor track record of the company.

However, the valuation metrics are relatively cheap for the company’s double-digit top-line growth. The company posted a 2022e EV/Revenue of 6.78x and is currently trading at a low P/B ratio of 0.85x. But given its poor bottom line, investors should stay away from this risky investment.

Cronos Group Inc. (CRON)

CRON is a cannabinoid company, focused on cannabis research, technology, and product development. Its portfolio includes Peace Naturals, Cove, Spinach, Lord Jones, and PEACE+. 

With these brands, CRON manufactures and distributes cannabis, hemp-derived CBD infused products, and cannabis-derived products for the medical and adult-use markets. 

CRON’s stock dipped 19.7% year-to-date, underperforming it’s benchmark, the MJ ETF.

The cannabis company’s net sales grew significantly in the past years, as the company nearly doubled its yearly top line in the past 3 years and should reach a value of CAD 873m in 2021, up 49.2% year-on-year.

On the other hand, CRON posted a one-time net profit of CAD 1.64b in 2019, after it reported an large interest income of CAD 1.28b over the year. Despite that, the company’s bottom line has deteriorated significantly in 2020, as it incurred a net loss of CAD 915m and should continue to post a loss over the next year, with a total loss of $221m in 2021 and $159m in 2022.

In terms of balance sheet, CRON has an anticipated net cash position of CAD 1.13b in 2021, which should be sufficient to fuel its operation in the next two years. Yet, similar to the company’s peer ACB, CRON has the habit of issuing new stock when lacking liquidities, which dilutes the stock and adds selling pressure.

CRON is valued at a 2022e EV/EBITDA of 9.27x and is currently trading 22% than its book value, with a P/B ratio of 1.22x.

Final Say

Stocks in the cannabis space have been beaten down this year, as marijuana companies continually delay their profitability target date. ACB and CRON have poor track records, posting yearly net losses and significantly diluting their shares. Which is why I believe investors should avoid these companies in the near term as the downward momentum is not expected to dissipate anytime soon.