If you’re new to cannabis investing, you’ve probably seen the phrase “investing in cannabis” thrown around a lot recently. While investing in cannabis is a big part of what we do here at reachweed, there are definitely some things you should avoid before investing in this industry.

Cannabis is a controversial industry. The federal government is still mulling over how to best deal with the growing industry, which is still seeing a lot of growth, regardless of federal legal status. The cannabis industry is very much in its infancy, and not every penny is going to be safe. In fact, there are a few poorly-performing cannabis stocks that everyone needs to avoid. Below are three of them.

What scares most investors is that, at this point, the cannabis industry is an emerging one. However, the “green rush” is already gaining popularity, and some companies are already seeing major returns on their investment. Three companies in particular, Canopy Growth (NYSE: CGC), Aphria (NYSE: APHA), and Cronos Group (NASDAQ: CRON) are companies that investors should avoid now.. Read more about curaleaf stock and let us know what you think.

3-Cannabis-Stocks-to-Avoid-Now

 

 

Marijuana might reach its full potential as a huge development opportunity if the government could simply get out of the way. Unfortunately, a tax and regulatory quagmire on the state level, combined with the federal government’s continued categorization of marijuana as an illegal drug, has placed a stumbling stone in the way of otherwise promising marijuana companies.

Other cannabis companies, on the other hand, seem to make it a point to destroy themselves and their investors. Because of self-inflicted wounds, Canopy Growth (NASDAQ:CGC), Charlotte’s Web Holdings (OTC:CWBHF), and Aurora Cannabis (NASDAQ:ACB) should be avoided.

Canada, oh Canada.

Eric Volkman (Canopy Growth): I believe Canopy Growth is not just a stock to avoid right now, but also one to avoid for the foreseeable future. 

Canopy Growth has been regarded as one of the sector’s incumbents since the entrance of a strategic (and deep-pocketed) partner, liquor giant Constellation Brands (NYSE:STZ), in 2018. However, not all stocks are created equal, even if they have a well-known investor.

Canopy Growth is the poster child for the marijuana industry’s usually loss-making nature, with repeated yearly bottom-line losses that have recently worsened alarmingly.

 

The damage in full-year 2020 was 1.74 billion Canadian dollars ($1.37 billion), which alarmed even the most hardened investors who had already lost over CA$1.3 billion ($1 billion) in 2019. This was almost twice the deficit of CA$736 million ($579 million) in 2018.

Canopy Growth invests a lot of money on asset acquisitions in order to expand its product line, network, and market share.

A slew of acquisitions (the most recent being Supreme, a high-quality Canadian manufacturer) have helped it bulk up and stay relevant in its home market. Despite this, it managed to record sequential revenue decreases in the two most recent quarters reported. The fact that Canopy Growth reported a rare, ostensibly significant net profit of CA$390 million ($307 million) in the most recent of those two periods astonished many (the first quarter of fiscal 2022). However, delving into the firm’s financial documentation reveals that this was due to “Other Income totalling $581 million during Q1 2022, mainly related to non-cash fair value adjustments of [CA]$601 million,” according to the company.

Fair value adjustments are basically accounting adjustments depending on a company’s inventory valuation and the expenses of selling it. This is a component of the International Financial Reporting Standards (IFRS) that a number of Canadian marijuana businesses employ, and these estimations aren’t always deemed precise. To put it politely, your nine-digit profit may not be all it’s made up to be.

Finally, compared to their American counterparts, Canadian marijuana businesses have lost popularity with investors.

This is a fair proposal. The U.S. market is far bigger, it isn’t developing like Canada’s (which turned the switch on the first, critical step of recreational marijuana legalization nationally in 2018), and it is blocked to direct Canadian exports for the foreseeable future (the drug is still technically illegal at the federal level, after all). U.S. operators are most likely to gain a leg up on the competition in the United States.

 

This CBD supply isn’t the same as it formerly was.

Charlotte’s Web Holdings’ Alex Carchidi: It’s sometimes better to stay away from a business that isn’t reaping the benefits of its market leading position. 

On that point, Charlotte’s Web produces a variety of health products for people and dogs, all of which include cannabidiol (CBD), a cannabis-derived compound. CBD is not inebriating, unlike other cannabis products, and supporters say that it offers health benefits, such as decreasing anxiety. So the CBD business is distinct from the growing medical and recreational cannabis industries, though there is likely some crossover. 

 

According to the firm’s most recent financial report, sales increased by just 11.4 percent year over year to $24.2 million, which is much too low for a relatively tiny company that investors would expect to expand rapidly. After 2019, when it took in $25 million in the second quarter, quarterly revenue seems to have plateaued. 

On top of this slowing demand, profitability has remained out of reach for the last two years. That was doubtlessly caused by sharp rises in Charlotte’s Web’s cost of goods sold (COGS) and its selling, general, and administrative (SG&A) expenses since 2018. At least some of the increased SG&A expenditures stem from growing its marketing channels and spending to maintain and expand its leading market share in several distribution segments. In 2020, Charlotte’s Web was the largest CBD pure-play competitor in e-commerce, food stores, drugstores, natural specialty retail, and mass retail.

Despite being the top dog in various sectors of the CBD industry, investors haven’t seen substantial revenue growth or profits in recent years. As a result, investors should avoid this stock until management can show that the company’s dominant market position is really advantageous to shareholders.

 

Concerns about quality control

Rich Duprey (Aurora Cannabis): Despite the fact that Aurora Cannabis is one of the most popular stocks on the Robinhood platform (it’s presently ranked 14th), it doesn’t merit the devotion that investors have shown to the company. 

Last quarter’s sales were down 21% from the previous quarter, while the consumer sector saw a 50% drop. Aurora worsened the issue by embarking on an acquisition binge in which it overpaid for manufacturing and distribution capacities, despite the fact that the Canadian government is more zealous in ordering broad lockdowns than the US government in order to combat COVID-19. 

Large portions of the expenditures have subsequently been written off. In many cases, this was due to the company’s inability to produce the premium, high-quality flowers that its expansion plan necessitates, especially at Sky, which was supposed to be its flagship greenhouse. Sky is now operating at just 25% of its full capacity while it works to resolve the problems.

Aurora’s propensity to dilute current shareholders in order to raise funds has also proven troubling. It announced a fresh plan in May to sell up to $300 million in shares in an at-the-market offering, and although those sales have allowed the marijuana stock to pay off one of its credit facilities, it still owes $300 million in long-term debt. It has $525 million in cash to its credit. So, despite the fact that it should be positioned for development, internal misfires continue to pull it down.

The stock is down 20% so far this year, but it has lost almost two-thirds of its value from its early-year highs. Aurora may be a good purchase at some point in the future, but that moment is not now, and investors should avoid it. It must demonstrate that it can consistently create high-quality products from all of its facilities in order to achieve its objective of being a premium manufacturer.

Three marijuana stocks to avoid: MMJ International (OTC: MMIWY), Green Thumb Industries (OTC: GTBIF), and MPX Bioceutical (OTC:MPXEF). Getting into the weed business isn’t for the faint of heart. It’s a high risk, high reward business with a lot of unpredictable variables.. Read more about hot stocks right now and let us know what you think.

This article broadly covered the following related topics:

  • tilray stock
  • curaleaf stock
  • cbd stocks to watch
  • aurora cannabi stock
  • stocks that are down right now
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