3 Pot Stocks to Avoid Completely in 2021
Marijuana stocks have been on fire lately, with four U.S. states – New Jersey, Arizona, South Dakota and Montana – all legalizing recreational marijuana in the November election. And now that Democrats have taken control of the Senate, it is very likely that the country is on the path to decriminalizing marijuana – or even full legalization at the federal level.
As legalization efforts simmer in the United States, investors should be on the lookout for well established cannabis companies that can generate profits while simultaneously achieving high revenue growth. There’s no good reason to buy into marijuana companies that bleed much-needed cash quarter after quarter. Let’s take a look at three pot stocks you should absolutely avoid.
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1. Cronos Group
Canadian medical and recreational marijuana company Cronos Group (NASDAQ: CRON) was largely under the radar until December 2018, when the tobacco giant Altria (NYSE: MO) bought a 45% stake for C $ 2.4 billion. In the third quarter of 2020, however, the company only managed to generate $ 11.4 million in quarterly revenue. While this is a significant improvement over the $ 5.8 million in sales achieved in the third quarter of 2019, Cronos is far from profitable.
In fact, the company has yet to make a gross profit and is currently losing $ 1.5 million per quarter after factoring in labor and cost of goods. In addition, its operating loss worsened from $ 30.7 million in the third quarter of 2019 to $ 41.2 million in the third quarter of 2020.
Over the past two years, Altria has lost 50% of its initial investment; Cronos still has around $ 1.3 billion in cash and securities. Its predicted growth in US expansion also did not perform well. In the third quarter of 2020, Cronos recorded $ 1.6 million in sales in the United States and spent $ 12.2 million in operating expenses to achieve that revenue.
Despite its poor financial performance, Cronos is overvalued, trading at 87 times sales. there is far better alternatives than Cronos for those who bet on Canadian pot growers with significant potential to expand in the south.
2. Canopy growth
Formerly a leader in the Canadian marijuana industry, Canopy growth (NASDAQ: CGC) had a hard time due to intense competition. In fact, it no longer holds the top market share when it comes to recreational cannabis and pot-infused drinks. These titles now belong to Aphria (NASDAQ: APHA) and HEXO (NYSE: HEXO), respectively.
In the second quarter of 2021 (which ended September 30), Canopy Growth managed to grow its revenue by 77% year-on-year to C $ 135.3 million. Although this is very impressive, his selling, general and administrative expenses were almost equal to his income. Additionally, the company is still losing about C $ 200 million per quarter in free cash flow – and that’s after improving the metric by 57% year-over-year.
Through aggressive cost-cutting measures, management expects to save up to $ 200 million in 24 months. However, it is likely that Canopy Growth will remain unprofitable for some time. In the meantime, the company has no choice but to spend more of its C $ 1.7 billion cash balance to fund operations. Considering the inability of the company to generate a solid net income, I would not pay 31 times the income to buy shares of this company at this time.
3. Organization chart
Yet another Canadian pot maker, Organizational chart (NASDAQ: OGI) continues to produce more cannabis than consumers demand, which continues to lose money. In the first quarter of 2021 (which ended November 30), the company’s revenue declined 23% year-over-year to C $ 19.3 million. In addition, its gross losses widened to C $ 16.7 million, from C $ 11.2 million a year earlier.
In addition, the company’s net loss increased to C $ 34.3 million from C $ 863,000 in the first quarter of 2020. Inventory write-downs and asset write-downs due to excessive expansion have been in the spotlight. origin of the decline.
To illustrate its problems: OrganiGram recently completed the final stages of expanding its Moncton grow facility, increasing its manufacturing capacity – but it is only using about 40% of that space, and management expects to “cultivate less than [its] capacity “for the foreseeable future. It trades at just 4.3 times sales for a reason: The company’s accelerating losses and overcapacity are two things that should signal investors to stay clear.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.
