A closer look at 2018 reveals a bifurcated year for the marijuana industry. On one hand, it gained validity like never before with Canada legalizing recreational weed, and a handful of U.S. states and other foreign countries giving the green light to cannabis use in some capacity. What had once been a taboo industry has become a legitimate means to make money in a number of key markets.
On the other hand, marijuana stock investors suffered through a miserable year, with most pot stocks ending lower by a double-digit percentage. And with cannabis shortages extending into 2019 and competition being fierce, there are no guarantees that marijuana stocks fare better this year.
As I look around at the more than four dozen marijuana stocks with a market cap in excess of $200 million, a few stand out as particularly avoidable in 2019. Here are four pot stocks to absolutely not buy.
Arguably the most polarizing pot stock of them all, Aurora Cannabis (NYSE:ACB) still looks like one to avoid in 2019.
Most investors are infatuated with Aurora Cannabis because they believe production is everything -- and it's not. Aurora is on track to become the leading producer by peak annual output. Following its ICC Labs acquisition, the company appears to be on pace for 700,000 kilograms in what this author estimates for peak annual output. Mind you, this could go substantially higher should Aurora choose to develop land owned by ICC Labs and MedReleaf. Though this production is bound to help Aurora secure supply deals and lower its per-gram growing costs, there are more than enough questions left unanswered to keep investors on the sidelines this year.
For starters, when will Aurora stop walking all over its shareholders with bought-deal offerings and dilutive acquisitions? No marijuana company has abused its shareholders more than Aurora, which has ballooned its outstanding share count from 16 million at the end of fiscal 2014 to probably more than 1 billion by the second quarter of fiscal 2019. This rising share count weighs on the value of existing shares, and makes it that much more difficult for Aurora Cannabis to generate a meaningful per-share profit.
There's also the little fact that Aurora Cannabis probably won't be profitable on an operating basis in 2019. Sure, it's received some help from derivatives, marketable security revaluation, and fair-value adjustments to biological assets. But when push comes to shove, it's losing money purely on an operating basis. Even with a surge in sales this year, operating losses may continue.
I get it: It's really easy to like vertically integrated dispensary operator MedMen Enterprises (NASDAQOTH:MMNFF) given that it's making the purchase of marijuana into an actual experience. MedMen is breaking down barriers by normalizing the cannabis-buying process, and it has translated into a higher sale-per-square-footage figure than you'll find in Apple stores. But from an investment perspective, the feel-good story stops there.
MedMen is in the process of purchasing PharmaCann for $682 million in what'll be the largest U.S.-based pot deal in history. When complete, the duo will have licenses to 66 retail locations in a dozen states, as well as 13 cultivation facilities. While I do understand MedMen's desire to speed up its expansion, it's paying a hefty price to do so.
Before announcing the PharmaCann deal, MedMen was already planning to have roughly 50 dispensaries open by 2020 (it has 14 currently). To do this, it was going to have to spend its cash liberally on developing new locations. In plain English, high administrative costs associated with its expansion give this company virtually no chance of turning an operating profit in 2019 (and likely 2020, too).
Just as worrisome, MedMen's steep operating losses may cause the company to turn to the secondary market to raise capital with regularity. Just as this dilution has weakened Aurora's share price, I expect it'll have a similar effect on MedMen's stock.
The Green Organic Dutchman
Another marijuana stock worth avoiding in 2019 is The Green Organic Dutchman (NASDAQOTH:TGODF).
Understandably, there is an argument in favor of possibly buying this grower, with its share price declining 40% last year, and the company on track to become the fourth- or fifth-largest grower by peak annual output (an estimated 195,000 kilograms). TGOD, as the company is also known, is devoting around 20% of its production to high-margin edibles and cannabis-infused beverages, which could attract investors.
Yet what I find most notable about The Green Organic Dutchman is the company's exceptionally late entry into the market. Through its fiscal third quarter, it hadn't registered any cannabis sales, and is unlikely to see the bulk of capacity expansion projects completed until sometime in 2019, or perhaps even 2020. The longer it takes TGOD to complete its projects and generate cannabis for harvest, the fewer opportunities it has to secure lucrative long-term supply deals.
I'd also caution investors from getting too excited about the company's edibles and beverage division. Although these will be high-margin products, competition among such alternative products looks to be fierce, with a handful of brand-name beverage deals already announced. The simple translation is that TGOD has almost no chance of generating an operating profit in 2019, making it an easily avoidable pot stock.
After debuting at a list price of $17 in mid-July, shares of the Canadian grower would hit $300 on the nose during intraday trading just two months later. Investors rode the Tilray bandwagon on the idea that it would land a major brand-name partner, given that its medical cannabis brands were already well recognized. Those brand-name partnerships did materialize in December, with Tilray securing a medical-products distribution deal with Novartis subsidiary Sandoz. And shortly thereafter, it announced a 50-50 joint venture with Anheuser-Busch InBev to research and develop cannabis-infused beverages.
But there are three concerns I have with Tilray. First, we have the end of the lock-up period in less than two weeks. Following the 180-day period when insiders haven't been able to sell, it's only logical to expect some selling pressure in the weeks ahead as some insiders lock in profits.
Second, Tilray is way off the pace in capacity expansion versus its larger peers. For instance, Tilray sports a higher market cap than Aurora Cannabis, yet its roughly 850,000 square feet in growing capacity, which might be capable of what I estimate to be 80,000 kilograms per year at peak production, pales in comparison with Aurora's 700,000 kilograms in peak output, or Canopy Growth's potential for more than 500,000 kilograms.
The third worry is that Tilray won't be profitable in 2019. Like Aurora, it'll be spending on capacity expansion, international expansion, medical cannabis research and development, and branding.
Tilray could reasonably lose half its value in 2019, and is therefore a stock you'll absolutely want to avoid.
Check out the latest Tilray earnings call transcript.