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3 Cannabis Stocks to Avoid Like the Plague in June

By Sean Williams – Jun 4, 2020 at 7:21AM

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These marijuana stocks are unlikely to have pot stock investors seeing green.

For years, marijuana stocks were viewed by investors as the greatest thing since sliced bread. With the legal pot industry generating $10.9 billion in worldwide sales in 2018, and Wall Street suggesting that annual global sales could hit $50 billion to $200 billion by 2030, investors figured they had a surefire winner on their hands.

But over the past 14 months, cannabis stocks have been an utter disaster. The reality of the challenges they're facing in Canada and the U.S. have sunk in with investors, and most pot stocks have seen their share price retrace anywhere from 50% to 95%.

The good news is that there will be long-term winners in this industry. With tens of billions of dollars being sold in the black market each year, and new states/countries passing laws to legalize cannabis, it's only logical to expect consumers to steadily move their purchases to legal channels over time.

The bad news, though, is that there are a lot of bad apples in the marijuana space. If you're looking to put your money to work in the pot industry, my suggestion would be to avoid the following three cannabis stocks like the plague in June.

A smoldering cannabis bud that's beginning to turn black.

Image source: Getty Images.

Aurora Cannabis

Although it was easily the hottest marijuana stock in May, and has consistently remained the most popular pot stock among millennial investors, I would strongly encourage investors not to put their money to work in Alberta-based Aurora Cannabis (ACB 4.07%).

At this time last year, Aurora Cannabis was living the dream. It had completed more than a dozen acquisitions, and was fully expected to lead Canada with over 650,000 kilos of peak annual output. Aurora also had access to two dozen markets outside of Canada.

But Aurora's dreams have been shattered by regulatory-based supply issues in the Canadian market, as well as its own poor risk management and ugly balance sheet.

One of Aurora's biggest problems is that its acquisition-heavy approach has left it in a cash bind. Despite halting construction on two of its largest projects, selling a 1-million-square-foot greenhouse, laying off 500 workers, and pledging to reduce its selling, general and administrative (SG&A) expenses by at least 55% in just three quarters, there's still no guarantee that Aurora will meet its new debt covenant or get anywhere near operating profitability. In fact, Aurora's only means of generating cash right now is to sell its common stock. Taking into account its recent 1-for-12 reverse split to avoid delisting from the New York Stock Exchange, Aurora's share count has risen from approximately 1 million to north of 110 million since June 30, 2014.

The company is also lugging around 2.42 billion Canadian dollars in goodwill, which works to 51% of its total assets. This goodwill is a representation of how much Aurora grossly overpaid for what now seem likely largely unnecessary acquisitions. With big future writedowns possible, this looks like a stock to avoid like the plague.

Unique cannabis strains in clearly labeled jars placed on a dispensary store countertop.

Image source: Getty Images.

MedMen Enterprises

Another incredibly hot cannabis stock in May that investors would be wise to keep their distance from is U.S. multistate operator MedMen Enterprises (MMNFF 0.53%).

Even though I've been ultra-bearish on MedMen Enterprises for quite some time, I will give management credit for somewhat improving the company's access to working capital in recent months. During its fiscal third quarter, MedMen disposed of noncore assets for $17 million, sold $7.8 million worth of stock, closed on $12.5 million in additional gross proceeds from a $250 million senior secured convertible debt facility, and netted $77.8 million from a secured term loan.

Just one problem. If you look at the company's balance sheet, you'll see $123.9 million in current assets and $184.5 million in current liabilities. In other words, MedMen doesn't look to have enough capital on hand to handle all of its expected expenditures over the next 12 months. Even with new sources of capital, MedMen's future remains very much in doubt.

Beyond MedMen's cash concerns, its core market of California continues to underwhelm. Despite accounting for almost two-thirds of MedMen's Q3 2020 sales, comparable-store sales growth from the prior-year period was a meager 5%. California is the largest pot market in the world, but MedMen is struggling mightily to grow its sales in the Golden State.

And, as you might have guessed, MedMen is losing a boatload of money. Even with more than $100 million in extrapolated annual SG&A savings, it reported a gross profit of $13.1 million in Q3 2020, which compares to $53.8 million in operating expenses and $13.3 million in interest expenses. MedMen is still a total dumpster fire that should be avoided at all costs

A small pile of one hundred dollar bills on fire.

Image source: Getty Images.

Canopy Growth

Finally, the largest cannabis stock in the world by market cap, Canopy Growth (CGC 7.90%), still looks to be a long-term work-in-progress that should be avoided by investors.

Compared to Aurora Cannabis and MedMen, Canopy Growth probably looks fantastic. It's a company with CA$1.98 billion in cash and cash equivalents (as of March 31, 2020), which is tops among pure-play pot stocks. And since Constellation Brands owns 38.6% of Canopy's outstanding shares, it has the backing and leadership of a time-tested company. Don't forget that former Constellation Brands CFO, David Klein, is now CEO at Canopy Growth.

But another way to look at this data is Canopy Growth burned through more than half of its CA$4.5 billion in cash and cash equivalents in a year. Though Klein has taken a very aggressive cost-cutting approach with Canopy, which includes permanently shutting down the Aldergrove and Delta indoor greenhouses that total 3 million square feet of licensed cultivation space, as well as laying off workers, Canopy is still burning through an incredible amount of capital.

Additionally, Canopy's operational performance has left a lot to be desired, even beyond its exceptionally high costs. During a quarter that saw Canadian pot sales hit a record high in two out of three months, Canopy's Canadian recreational revenue fell by 28% from its sequential third quarter, with Canadian medical sales up a measly 1% on a sequential basis. Sales for the company's ancillary product sales fell, too, on a sequential basis. 

Canopy Growth may have the capital needed to turn itself around, but that turnaround is going to be many years in the making. There are far better cannabis stocks to invest your money into.

Sean Williams has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Constellation Brands. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Canopy Growth Stock Quote
Canopy Growth
$3.14 (7.90%) $0.23
Aurora Cannabis Stock Quote
Aurora Cannabis
$1.28 (4.07%) $0.05
MedMen Enterprises Stock Quote
MedMen Enterprises
$0.04 (0.53%) $0.00

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