If you think the beating the stock market has taken over the past two months is brutal, then chances are you haven't paid close attention to the cannabis space. Over the past 12-plus months, marijuana stocks have lost anywhere from 50% to 95% of their value and have, in many instances, wiped away years of gains.
The good news, if there's any to be found from such an abysmal performance, is that there is a quantifiably large market for pot stocks over the long term. Tens of billions of dollars are conducted in black-market sales each year, meaning there's ample opportunity to move these consumers into legal channels.
But the obvious bad news is that not every pot stock can be a winner. With the North American cannabis industry wrought with challenges, I'd suggest avoiding the following three pot stocks like the plague for the remainder of 2020, if not beyond.
Despite being the most-held stock on the entirety of the millennial-focused Robinhood platform, Aurora Cannabis (ACB 8.70%) might be the most avoidable of all marijuana stocks. This is a company that just last week announced that it would enact a 1-for-12 reverse split just to keep its common stock listed on the New York Stock Exchange (NYSE) and avoid delisting. But make no mistake about it, shareholders are down a not-so-pleasant 92% since mid-March 2019.
From top to bottom, Aurora is a dumpster fire. The company continues to lose substantial amounts of money on an operating basis, has halted construction on two of its largest production projects, and has put another 1-million-square-foot greenhouse (Exeter) up for sale. Initially expected to top 660,000 kilos of peak annual output, Aurora Cannabis is on track for perhaps 150,000 kilos of production in fiscal 2020, and even this level is overwhelming ill-prepared domestic markets.
But the biggest issue just might be Aurora's balance sheet. The company has $205 million Canadian in cash, but anticipated at the end of Dec. 31, 2019, that it would face close to CA$374 million in liabilities over the next 12 months. This means issuing stock on a dilutive basis is pretty much the only way for Aurora Cannabis to raise cash. Having already ballooned its outstanding share count from 16 million to 1.31 billion in less than six years, Aurora may wind up issuing another $350 million worth (that's U.S. dollars) of its common stock.
There's also the growing possibility of a writedown. Even after taking a CA$762.2 million impairment against goodwill in the fiscal second quarter, Aurora Cannabis is still lugging around CA$2.41 billion in goodwill on its balance sheet. This works out to 52% of total assets and strongly suggests that the company grossly overpaid for its numerous acquisitions.
I could easily see Aurora Cannabis' stock losing another 50%, if not more, which makes it wholly avoidable.
Once a Wall Street darling, there's now virtually nothing about Canadian licensed producer Tilray (TLRY) that makes it an attractive investment. As a reminder, this was a stock that listed its initial public offering at $17 in July 2018, ran up to $300 a share by mid-September, and hit $2 a share during the market meltdown last month. It's come full circle and some... and it's still not worth buying.
One of Tilray's biggest issues is it's being run as if it were a rudderless ship. Management has run with the idea that Tilray should focus its attention entirely on the U.S. and European markets. While these markets do offer higher sales potential than Canada, completely shifting the company's growth strategy six months after Canadian adult-use weed sales commenced was a really odd move. It also means having to outlay quite a bit of money to build up overseas infrastructure, which has whittled away Tilray's cash pile.
Speaking of cash, cash equivalents, and short-term investments, Tilray ended 2018 with a seemingly healthy $517.6 million (note, Tilray reports in U.S. dollars). However, by the time Dec. 31, 2019 rolled around, Tilray's cash pile had shrunk to less than $97 million. Left with little choice but to raise capital, Tilray wound up pricing a $90.4 million share offering during the midst of the coronavirus disease 2019 (COVID-19) pandemic. The $4.76 selling price for its shares was considerably lower than the previous day's closing price for the company.
To boot, there are warrants attached to these shares that can be exercised after six months at a price of $5.95. This is a fancy way of saying that shareholders are going to be diluted immediately by the stock sale, and could continue to be buried by new shares as warrants are exercised, thusly capping any near-term gains.
With no shot at profitability in 2020, Tilray is an easy pot stock for investors to bypass.
If you're noticing a theme here, it's that most Canadian licensed producers are an absolute mess, and Quebec-based HEXO (HEXO 1.79%) is no different. My expectation had been that signing the largest wholesale agreement in history with its home province of Quebec would have seriously de-risked HEXO as an investment -- but how wrong I've been. Even at less than $0.50 a share, HEXO remains entirely avoidable for the remainder of 2020.
Like Aurora Cannabis, HEXO has been paring back its operations as quickly as it can to conserve cash. It initial halted activity at its Niagara facility, which was acquired in the Newstrike Brands deal, but now has plans to close the facility permanently and sell it. HEXO has reduced its peak annual output potential by about a third over the last six months, and was responsible for laying off 200 workers back in October.
Similar to its peers, HEXO is facing a cash crunch that's forced it to turn to common stock offerings and convertible debt issuances to raise capital. Less than two weeks ago, HEXO completed a CA$46 million offering that saw close to 60 million new shares of stock get issued. Additionally, these shares came with warrants that have an exercise price of CA$0.96. Thus, similar to Tilray, any near-term upside is likely going to be capped by investors exercising their warrants and diluting the heck out of existing shareholders.
Unlike Aurora Cannabis, HEXO hasn't rectified its share price insufficiency with the NYSE, as of yet. Without a sustainable doubling in HEXO's share price, the company will need to enact a reverse split in the not-so-distant future, otherwise it could be delisted. Publicly traded companies that enact reverse splits have historically performed poorly after they're completed.
Also with no near-term chance at operating profitability, HEXO checks all the boxes for investor avoidance.