3 Pot Stocks to Avoid Like the Plague in March

Over the next decade, cannabis chronicles as one of the fastest-growing industries in North America. Although estimates vary wildly, as we’d expect from an industry that’s existed for decades in the black market, North American pot sales have the opportunity to reach $75 billion annually by the end of the decade. That’s growth Wall Street and retail investors should rightly not ignore…

However, we also know that not every company in next-big-thing investment industries will be a winner. As the pot industry has matured a bit over the past four years, we’ve witnessed clear separation between the haves and have-nots.

As we move headlong into March and look forward to warmer weather, investors would be wise to avoid the following three pot stocks like the plague.

Sundial Growers

Among millennial investors, there’s not a more popular marijuana stock than Sundial Growers (NASDAQ:SNDL). This cannabis penny stock has been as high as No. 3 on Robinhood’s leaderboard (a ranking of the most-held stocks on the platform). Unfortunately, there looks to be little substance behind its recent rally.

Sundial has quickly become one of the favorites of retail investors on Reddit’s WallStreetBets (WSB) chatroom. As a refresher, retail traders on WSB are usually looking for heavily short-sold companies or penny stocks that can quickly be driven higher. In few instances are there are genuine fundamental reasons behind a move higher in a Reddit-rally stock.

The biggest issue with Sundial is that management has walked all over its shareholders in an effort to improve its balance sheet. Since the end of September, the company issued more than 1.1 billion shares via a combination of direct share offerings and debt-to-equity swaps. This more than tripled Sundial’s outstanding share count to about 1.66 billion shares. Worse yet, it’s probably not done. Sundial issued new warrants last month, and its board recently OK’d a shelf offering that would allow for the sale of up to $1 billion in new shares. The dilution here is off the scales.

Sundial Growers is also going to be late to the retail party. The company has made the decision to shift its focus from low-margin wholesale cannabis to higher-margin retail. While potentially a smart move over the longer-term, it’s going to produce some ugly year-over-year sales and bottom-line comparisons at a time when most cannabis stocks are turning the corner to profitability.

The only thing driving Sundial higher in recent weeks is social media chatter. Without significant top-and-bottom-line improvements, there’s little reason for it to trade over its cash value (about $0.41 per share).

Cronos Group

Another pot stock that should be cordoned offer with yellow caution tape is Canadian licensed producer Cronos Group (NASDAQ:CRON).

Cronos does have some redeeming qualities that have made it a popular selection among young investors. It ended 2020 with close to $1.3 billion in cash and cash equivalents, and it has a powerful equity investor in Altria Group (NYSE:MO). Altria, the tobacco giant behind the premium Marlboro brand, owns a 45% stake in Cronos, and is expected to aid in product development, marketing, and perhaps even distribution efforts.

The bad news for investors is that these selling points are overshadowed by miscues and poor operating performance, as seen in the company’s fourth-quarter and full-year results last week.

Although the company’s sales rocketed higher to $17 million in Q4 (its highest quarter of sales on record), just $1.93 million of its $13.54 million in rest-of-world sales (this primarily means Canada) came from higher-margin extracts. That was only up 3% from the prior-year period, despite the fact that high-margin derivatives were legalized for sale in mid-December 2019. Between regulatory hurdles and poor execution, Cronos Group has badly missed the mark with these higher-margin sales channels.

Cronos is also losing money hand over fist. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) widened by more than…

Continue reading at THE MOTLEY FOOL

 

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