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3 Marijuana Stocks to Avoid Like the Plague in November

By Sean Williams - Nov 1, 2019 at 7:21AM

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These popular pot stocks should remain off-limits this month.

Over the next decade, investors would struggle to find a more attractive growth opportunity than legal marijuana. This is an industry that has the potential to see sales grow fivefold to 18-fold by 2030 from the $10.9 billion in worldwide sales recorded in 2018.

But it's also an industry that has a lot of growing up to do. Between supply issues in Canada, high tax rates in select U.S. states, and a persistent black market throughout North America, pot stocks have gone up in smoke in recent months.

While some of these cannabis stocks may look like genuine bargains, others should still be avoided for the immediate future. Here are three marijuana stocks that are best left on the shelf in November.

A dried cannabis bud and small vial of cannabinoid-rich liquid, next to a small Canadian flag

Image source: Getty Images.

1. HEXO Corp.

Quebec-based cannabis grower HEXO ( HEXO -6.30% ) had an awful October, and November isn't shaping up to be any better.

For those of you who may not be following HEXO closely, the company's share price imploded following an update to its fourth-quarter operating results and fiscal 2020 outlook. Heading into the quarter, HEXO had previously been forecasting a rough doubling in sequential quarterly revenue, as well as 400 million Canadian dollars in 2020 sales. The update completely pulled the company's forward sales guidance for next year, and it reduced fourth-quarter sales to a range of CA$14.5 million to CA$16.5 million. That implies 19% sequential quarterly growth at the midpoint, when 100% had been expected.

HEXO wound up blaming a trio of factors for this weakness. The company cited the slow rollout of physical dispensaries, early-stage pricing pressures on cannabis, and the delayed launch of derivative products as reasons for its tempered outlook. It's important to note that while all of these issues are fixable, it's going to take time to do so, suggesting that nothing will improve anytime soon for HEXO.

More recently, the company announced that it would delay the release of its fourth-quarter operating results and issue CA$70 million in convertible debentures, all while cutting 200 jobs. This is a logical decision given the weaker near-term outlook for the Canadian cannabis landscape, but it's a wakeup call to shareholders about just how serious this slowdown could be.

Lastly, HEXO also announced plans in October to introduce a value line of cannabis products under the Original Stash brand name. The problem is, this value line, while more price-competitive with the black market, could be a potential margin killer. While I think HEXO has clear-cut long-term advantages, it's a pot stock to avoid for the time being.

A bearded young man wearing sunglasses that's exhaling vape smoke while outside.

Image source: Getty Images.

2. Cronos Group

Next up is one of the most popular pot stocks, according to millennial-favorite online app Robinhood: Cronos Group ( CRON -5.46% ).

The lures of Cronos have long been its focus on high-margin cannabinoids and derivatives, and its bountiful cash position. Remember, in March Cronos closed a $1.8 billion equity investment from Altria Group ( MO 1.64% ) that gave the tobacco giant a 45% non-diluted stake in the company. Presumably, this cash gives Cronos plenty of runway to see its strategy become reality.

However, Cronos' stock has been pummeled of late, and I believe this is for very good reasons. For one, the company hasn't done much on the earnings front to merit a premium valuation. Sure, it's produced some hefty per-share profits in each of the past two quarters, but this was entirely based on revaluing derivative liabilities (warrants) and had nothing to do with its actual business performance. If we were to back out all of the company's one-time benefits and fair-value adjustments, we'd see that it's still losing quite a bit of money, and has been even slower to ramp up production than many of its smaller peers.

Investors also can't overlook the growing worries surrounding vaping in the United States. According to the Centers for Disease Control and Prevention (CDC), 1,604 confirmed or probable cases of vaping-related mystery lung illnesses had been reported across 49 states, leading to 34 deaths, as of Oct. 22. The CDC has no specifics to report as to what's causing these illnesses, save to suggest that users not vape liquids containing tetrahydrocannabinol (THC) -- the cannabinoid that gets users high. Suffice it to say that Cronos Group's partner Altria is expected to play a big role in helping the company grow its vape business in Canada, but that plan may (pardon the pun) take a hit in the interim.

As such, big cash pile or not, Cronos Group remains a marijuana stock worth avoiding.

A neat stack of $100 bills under lock and chain

Image source: Getty Images.

3. CannTrust Holdings

Lastly, a regular on the "avoid" list of late makes yet another return: CannTrust Holdings ( CNTTQ 0.00% ).

October proved to be a pretty eventful month for CannTrust, which had its sales and cultivation licenses suspended by Health Canada in September, following the July admission that it grew unlicensed weed in five rooms for a period of six months. In October, CannTrust announced that it would be destroying about $58 million (that's U.S.) worth of marijuana that was in inventory or recouped from buyers. This is being done to satisfy a pretty stringent list of requirements set forth by Health Canada if the company wants to regain its growing and sales licenses.

Much like HEXO, CannTrust also recently announced that it'd be shedding up to 140 jobs on what it believes will be a temporary basis. The move makes sense given that the company isn't propagating additional plants at the moment, and is unable to sell any product until it regains its licenses.

This might sounds like substantive progress, but CannTrust's updates also suggest that it probably won't be able to produce financial statements for several additional weeks, and it won't satisfy Health Canada's list of requirements to regain compliance with the Cannabis Act until sometime in the first quarter of 2020. Essentially, CannTrust has no very near-term catalysts, and that's worrisome for a company that's still burning cash.

While I do believe CannTrust has all-or-nothing potential, there's no reason for investors to chase this embattled pot grower in November.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Cronos Group Stock Quote
Cronos Group
$4.16 (-5.46%) $0.24
HEXO Stock Quote
$0.94 (-6.30%) $0.06
CannTrust Holdings Inc. Stock Quote
CannTrust Holdings Inc.
$0.01 (0.00%) $0.00
Altria Group, Inc. Stock Quote
Altria Group, Inc.
$43.92 (1.64%) $0.71

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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