Despite its growing pains, marijuana remains an intriguing long-term investment opportunity. That's because we know more countries (and U.S. states) are likely to legalize cannabis over time, and tens of billions of dollars in sales are being conducted in the black market each year. Simply moving these sales over to legal channels could grow annual pot revenue from $10.9 billion in 2018 to a minimum of $50 billion by 2030.
However, this doesn't mean every cannabis stock is going to be a winner. There are three pot stocks that are performing so poorly at the moment that I wouldn't suggest buying them no matter how cheap they appear... even with free money.
Perhaps the most dangerous cannabis stock of them all is the one that millennial investors fancy the most: Aurora Cannabis (ACB -5.50%).
As recently as six months ago, Aurora had the profile of an eventual winner. It was projected to be the world's leading weed producer, and it had a cultivation, research, partnership, or export presence in 24 additional countries outside Canada. But the walls have come tumbling down quickly.
In November, Aurora Cannabis announced plans to halt construction at two of its largest cultivation farms (Aurora Nordic 2 in Denmark and Aurora Sun in Alberta) to conserve capital. Then, in January, the company put its 1-million-square-foot Exeter greenhouse up for sale (Exeter has yet to be retrofit for cannabis production). All told, this removes more than 400,000 kilos of peak run-rate output from the equation and no longer makes Aurora the clear production leader.
What's more, the company's balance sheet is an absolute mess. Aurora ended the fiscal second quarter with $156.3 million Canadian in cash and cash equivalents and CA$26.1 million in marketable securities, which ultimately pales in comparison to the CA$373.6 million in forecast liabilities over the next 12 months. For now, issuing its common stock and diluting current shareholders looks to be the only surefire method for raising capital.
There's also Aurora's CA$2.41 billion in goodwill that stems from grossly overpaying for its completed acquisitions. Mind you, this figure is after writing down CA$762.2 million in goodwill during the fiscal second quarter. Future writedowns appear very likely, especially with goodwill still accounting for 52% of total assets.
As the icing on the cake, Aurora's share price is dangerously close to dipping below $1, which may lead to it being delisted from the New York Stock Exchange. No matter how low Aurora's stock goes, it's worth avoiding.
Then there's U.S. vertically integrated multistate operator (MSO) MedMen Enterprises (MMNFF -4.15%), which might be the only pot stock with an even uglier balance sheet than Aurora Cannabis.
As of October 2018, everything was looking up for MedMen. It had announced an all-stock deal to acquire privately held MSO PharmaCann for what amounted to $682 million, which would double its state-level presence and add roughly two dozen dispensary licenses. Given that the U.S. is expected to lead the world in yearly weed sales, MedMen looked to be on track to be an early winner. However, hindsight has shown that MedMen tried to bite off more than it could chew.
Just days from the one-year anniversary of its PharmaCann deal announcement, MedMen shelved it. MedMen offered a number of reasons why the deal no longer made sense, but MedMen's cash problem looks to be the real reason this acquisition was called off.
As of the end of the fiscal second quarter (Dec. 28, 2019), MedMen had just $26 million in cash remaining. What's more, in December the company announced that it no longer had access to the final $115 million in financing of the $280 million pledged by private equity company Gotham Green Partners. Things have become so dire that the company has offered to pay off some of its vendors with its own common stock, which could further dilute existing shareholders.
Were MedMen's serious cash concerns not reason enough to avoid this stock like the plague, California's early stage miscues have slowed growth for the company's core California locations. The end result being that even with reduced selling, general and administrative expenses, MedMen has lost $103.3 million on an operating basis through the first six months of fiscal 2020.
Put plainly, I'm not certain MedMen will survive, which is why I wouldn't touch this stock with any money (free or not)!
Lastly, I wouldn't consider buying once-powerful Canadian licensed producer Tilray (TLRY), even if I were offered free money to do so.
When Tilray became the first Canadian pot stock to debut as an initial public offering on a major U.S. exchange in July 2018, there was a lot of hype. In fact, there was so much buzz surrounding Tilray that its share price would rocket from a listing price of $17 to hit $300 on the nose during intraday trading just two months later. As of this past weekend, though, Tilray's share price was barely clinging to the $10 threshold.
Maybe the most apparent issue with Tilray is the lack of faith in management. In March 2019, CEO Brendan Kennedy surprisingly announced that his company would de-emphasize future investments in Canada in favor of Europe and the United States. While these are larger potential markets, it's an odd decision to make so early into Canada's adult-use cannabis launch. At this point, there doesn't seem to be a well-defined strategy as to where Tilray goes next.
Similar to Aurora and MedMen, Tilray looks to be facing a serious cash crunch in the not-so-distant future. Having ended the previous year with $517.6 million in cash, cash equivalents, and short-term investments, ongoing losses and acquisitions have pushed its total cash balance below $97 million. Tilray did sign a $60 million two-year credit facility late last month, but that looks to be insufficient given how quickly the company is burning through its cash.
It's also looking as if Tilray's foray into the U.S. cannabidiol (CBD) market will be a disappointment. With the Food and Drug Administration taking a pretty harsh stance toward CBD as a food or beverage additive, Tilray's purchase of hemp foods company Manitoba Harvest may prove grossly overpriced.
With Tilray likely still years from generating a recurring profit, it remains a cannabis stock worth avoiding at all costs.