Forget Aurora, Canopy, and Cronos: This Is the Only Canadian Pot Stock to Buy

When Canada launched recreational marijuana sales a little over a year ago, hopes (and valuations for pot stocks) were incredibly high. Canada was the first industrialized country in the modern era to give adult-use weed the green light, and numerous U.S. states have been pushing toward medical or recreational legalization. With Wall Street calling for between $50 billion and $200 billion in worldwide annual sales by 2030, it looked as if investors couldn’t lose.

But lose they have…

Investors continue to pile into these three popular cannabis stocks

Since the end of March, the Horizons Marijuana Life Sciences ETF, first cannabis-focused exchange-traded fund, has lost about 55% of its value, while most popular pot stocks have shed well over half of their value. This has some investors wondering if marijuana stocks might be a solid bargain at these levels.

In particular, no marijuana stocks seem to be more popular, or more held among millennial investors, than Aurora Cannabis (NYSE:ACB)Canopy Growth (NYSE:CGC), and Cronos Group (NASDAQ:CRON). According to online investing app Robinhood, which caters to millennials, Aurora, Cronos, and Canopy are the respective first, ninth, and 10th most held stocks on the platform.

What makes these three Canadian pot stocks so popular is their combination of branding, partnerships, output, and/or cash. Canopy Growth and Cronos Group, for instance, both landed major equity investments over the past 13 months. Constellation Brands dropped $4 billion into Canopy for a 37% stake, with tobacco giant Altria Group handing over $1.8 billion to Cronos for a 45% stake in the company. Even though these cash balances have shrunk as Canopy and Cronos put some of their capital to work, they’re still in a far more enviable position than pretty much every other pot stock.

Meanwhile, Aurora Cannabis has the economy-of-scale edge. If it were to fully develop all 15 of its cultivation facilities, it would be producing more marijuana per year than any of its peers — and it’s not even close.

No, Aurora, Canopy, and Cronos aren’t worth buying

Yet all three of these exceptionally popular pot stocks is highly flawed and worth avoiding in the interim.

  • Canopy Growth is losing money at an extraordinary rate and recently reported fiscal second-quarter operating results where shared-based compensation by itself was higher than the company’s net cannabis sales.
  • Cronos Group has been generating very little in sales, it’s way behind its peers from a production perspective, and the company continues to lose money on an operating basis, if fair-value adjustments and derivative liability revaluations are removed from the equation.
  • Aurora Cannabis’ expectations for profitability have been pushed further down the line, with the company now idling about half of its peak production capacity and lugging around approximately $2.4 billion in goodwill. This accounts for 57% of the company’s total assets and looks to be portending a future writedown.

Not to mention, these three Canadian juggernauts are facing supply issues in their domestic market that are unlikely to ebb anytime soon. Health Canada has struggled to get through a backlog of licensing applications that began the year north of 800. We’ve also seen a handful of provinces slow-step the rollout of physical dispensaries. Ontario, which is home to almost 2 out of 5 Canadians, had just two dozen open dispensaries on the one-year anniversary of the launch of adult-use cannabis sales.

To be clear, these supply issues are fixable. However, it’s going to take multiple quarters before we begin to see Aurora, Canopy, or Cronos making notable progress on their income statements…

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