After months of sizzling gains, marijuana stocks cooled off in a big way in May. The Horizons Marijuana Life Sciences ETF, the first tradable cannabis ETF that holds more than four dozen pot stocks of various weightings, fell by more than 13% in May after having tripled the S&P 500’s return through the first four months of the year.
For some investors, this decline could be the perfect opportunity to go shopping. After all, the global pot industry is expected to see sales grow fourfold to sixfold between 2018 and 2029/2030, according to various Wall Street estimates. However, this doesn’t mean the entire gamut of pot stocks is worth buying.
After perusing the nearly five dozen marijuana stocks I follow on a regular basis, I believe three should be avoided like the plague in the month of June…
Repeat after me: “Production isn’t everything.” Once more for those people in the back, “Production isn’t everything!”
There’s no denying that Aurora Cannabis (NYSE:ACB) looks to be the clear cannabis production leader in Canada. It’s already on pace for more than 150,000 kilograms on an annual run-rate basis, and projects for at least 625,000 kilos of yearly run-rate output by the midpoint of 2020, assuming its Aurora Sun, Exeter, and Aurora Nordic 2 grow farms receive cultivation licenses.
It’s also a company that’s done a bang-up job of pushing into foreign markets, with a production and/or distribution presence in 24 countries worldwide, including Canada. These external sales channels will really begin to come into play a few years from now when dried flower oversupply becomes a problem in Canada, as it’s done in so many of the recreationally legal U.S. states.
But what Aurora Cannabis hasn’t done is demonstrate that it can develop its own cannabis brands without acquiring them, or develop a line of derivative products without a brand-name partner. Aurora Cannabis has made 15 acquisitions since August 2016, and many of these buyouts have made it into the perceived-to-be dominant pot stock it is today. But these buyouts are mostly shortcuts that mask the fact that we’ve yet to see the company do much organically. Acquisitive growth, just like cost-cutting, can only take a company so far.
To boot, Aurora has yet to demonstrate that it’s going to be profitable on a recurring basis anytime soon. Yes, management expects recurring EBITDA to become positive in the fiscal fourth quarter (April-June 2019), but positive EBITDA doesn’t mean profitability. In fact, what had looked like healthy profits of around 100 million Canadian dollars (CA$0.10 per share) in fiscal 2020 have evaporated, with the consensus Wall Street estimate now calling for nil (CA$0.00) in fiscal 2020.
And, as always, there’s the incessant share-based dilution. This dilution has caused Aurora’s market cap to nearly triple since the beginning of 2018, but shareholders actually lost money over this time period. It’s unclear when Aurora is going to put its shareholders first, which is all the more reason to keep your distance from Canada’s top producer in June…
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