This could very well be the decade that has cannabis investors seeing green. In the U.S., pot sales are expected to grow by an annualized rate of 21% through 2025, according to New Frontier Data. Meanwhile, marijuana-focused analytics company BDSA is counting on Canada’s weed revenue to more than double to $6.4 billion by 2026. All told, the North American pot industry could be…
bringing in $50 billion a year by the middle of the decade.
However, one of the constants of next-big-thing investments is that not every company can be a winner. The cannabis industry is highly competitive, and quite a few businesses simply aren’t in great shape. As we move headlong into April, the following three pot stocks stand out like a sore thumb as those investors should avoid like the plague.
After recently referring to Canadian licensed producer Sundial Growers (NASDAQ:SNDL) as the “absolute worst marijuana stock money can buy,” it should come as no surprise that it’s a no-brainer avoid in April.
The bulk of Sundial Growers’ gains since the year began are the result of the Reddit frenzy. Without (pardon the pun) getting too far into the weeds, retail investors on Reddit’s WallStreetBets chat room have essentially banded together to buy shares and out-of-the-money call options in stocks with high levels of short interest. The goal for these predominantly young retail investors is to create a short squeeze — i.e., an event where pessimists hoping for a share price decline feel trapped by a rapidly rising stock and rush for the exit. Sundial underwent a short squeeze two months ago, but has since tailed off.
Optimists in Sundial will also point to the company’s $719 million Canadian ($571 million U.S.) in cash and no debt as part of the buy thesis. However, this capital was raised by diluting the daylights out of existing shareholders. This is a company that had 509 million shares outstanding on Sept. 30, 2020, but was lugging around 1.66 billion shares five months later. A combination of share offerings, debt-to-equity swaps, and warrant exercising drove its share count into the stratosphere.
Think about this for a moment: With 1.66 billion shares outstanding, the company would need to generate close to $25 million in net income just to produce a rounded-up $0.02 per share profit. Because Sundial is one of the slowest-growing marijuana stocks, it’s not expected to become profitable until 2023, or top $0.01 in per-share earnings when it does become profitable. Wall Street also isn’t counting on $100 million in sales until at least 2024.
What’s more, the company’s outstanding share count is going to make delisting a constant threat. Sundial’s only true asset is its cash, which equates to just $0.34 per share. Above $0.34, investors are purely speculating on a company that’s losing money and has no defined game plan.
Suffice it to say, Sundial really is the worst pot stock money can buy.
MedMen is a penny stock, and retail investors love penny stocks almost as much as they love a good short squeeze. With cannabis stocks soaring earlier this year after Democrats won back the U.S. Senate by the narrowest of margins, MedMen caught fire. The prospects for cannabis reform at the federal level proved more than enough for speculators to dive in. However, with shares of the company up nearly 200% year-to-date, it’s pretty hard to overlook how poorly MedMen has been run.
This is a company that tried to be one of the premier national players, but its previous management team was far too overzealous. MedMen was forced to back out of its PharmaCann acquisition in October 2019, a year after it was announced, and it’s been scrambling to cut costs and control its cash burn ever since. Even with significant cost-cutting, MedMen is nowhere near profitability and its funding situation is precarious, at best.
According to the company’s fiscal second-quarter results (ended Dec. 26, 2020), it had just $7.5 million in cash, yet lost $68.9 million for the quarter, including a $24 million tax provision expense. Worse yet, revenue was flat from the sequential quarter (up 0.3%).
Even with a handful of supportive capital partners, MedMen has turned to…
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