The market has had a tough year, but North American pot stocks have thrived. The coronavirus disease 2019 (COVID-19) pandemic hasn't deterred consumers eager to buy cannabis products. In Canada, licensed cannabis store sales hit yet another all-time high in September ($197.5 million).
But as investors, we also know that not every company in a high-growth industry can be a winner. As we prepare to turn the page on 2020, my suggestion would be to avoid the following three pot stocks like the plague in December.
Canadian licensed producer Aurora Cannabis (ACB -0.22%) should be a permanent fixture in this monthly column. Although it's been on fire since the U.S. election last month, there are many reasons I'm not buying into the misplaced euphoria surrounding this company.
At the moment, investors seem excited about the prospects for legalization; Joe Biden won the White House, and the Democrat-led House of Representatives will vote on the MORE Act this month. The Marijuana Opportunity, Reinvestment, and Expungement Act would decriminalize cannabis at the federal level and impose a retail tax on legal weed sales.
This sounds great on paper, but Biden's decriminalization plan has issues. Further, the MORE Act is dead on arrival as long as Sen. Mitch McConnell remains Senate Majority Leader. A House vote is nothing more than a talking point, which means Aurora is still far from entering the U.S. pot industry.
The bigger issue with Aurora Cannabis has always been its complete disregard for its shareholders. Whether to finance acquisitions or internal expansion, Aurora has often sold its common stock to raise capital. Between June 2014 and October 2020, its share count grew by more than 11,800% -- and it's not finished. Recently, the company's board approved a $500 million shelf offering that'll mean ongoing dilution.
Though most of Aurora's previous management team is gone, investors continue to suffer for their mistakes. In fiscal 2020 (ended June 30, 2020), Aurora recorded a $3.3 billion Canadian net loss, much of which can be attributed to goodwill and asset writedowns. The company was far too overzealous in the capacity expansion department and was forced to close facilities, lay off workers, and take huge impairment charges in fiscal 2020.
As the icing on the cake, Aurora continues to move back the goalposts for achieving positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). There's no reason to trust management or invest in this marijuana stock.
Another blazing-hot pot stock that investors would be smart to avoid in December is small-cap Sundial Growers (SNDL -1.01%).
Shares of Sundial more than quadrupled in November for many of the same reasons described above. Additionally, on Nov. 11, the company reported its third-quarter operating results that featured a CA$23 million reduction in debt and lower general and administrative expenses. Given the company's shift away from wholesale cannabis and toward higher-margin branded retail sales, investors have liked what they've seen.
Yet this company is still a hot mess.
One of the more front-and-center issues for Sundial is that it'll likely need a reverse split to remain listed on the Nasdaq. Historically, investors have seen reverse splits as signs of weakness. Most companies don't fare well after reverse splits.
The second problem is that Sundial's improved cash position has come at the expense of its shareholders. In recent months, Sundial has sold stock and converted some of its outstanding debt to equity. Its share count is thus ballooning. Although it has a healthier cash balance, Sundial may continue to lean on unfriendly tactics to raise capital.
Sundial Growers' operating results aren't all that impressive, either. Transitioning away from low-margin wholesale cannabis isn't going to happen overnight. That's a problem for a company that's reported a whopping CA$151.5 million in operating losses through the first nine months of 2020.
In other words, Sundial Growers is probably just the flavor of the week among day traders. It lacks the true substance that long-term investors crave. Avoid it.
A third marijuana stock that should be on investors' naughty list is Canadian licensed producer Tilray (TLRY).
Shares of the red-hot Tilray were up 58% in November, with excitement surrounding U.S. legalization pushing its valuation notably higher. The company also surged after reporting its third-quarter operating results. Tilray's net loss of $2.3 million (that's U.S.) came in much lower than Wall Street expected, with international medical cannabis sales jumping 42% from the prior-year period to $8.1 million.
Headlines paint a rosy picture, but a little digging should have investors scurrying away.
Delve deeper into Tilray's Q3 report, and you'll see that the company received a $31.9 million boost from warrant liability adjustments. If this one-time benefit is removed, but other pertinent operating expenses are kept, Tilray's net loss comes in closer to $34 million. The company has already lost $268.1 million on a year-to-date basis.
Furthermore, Tilray has serious cash concerns that it's been addressing by selling stock via at-the-market offerings (just like Aurora) and converting debt to common stock. A little over a week ago, the company announced its intent to convert an aggregate of $197.2 million in convertible debt to stock. This will dramatically increase the company's outstanding share count and weigh heavily on its shareholders.
Operating as it does without a clear strategy, Tilray is no place for investors' hard-earned money.