I much prefer analyzing (and writing about) stocks to buy rather than stocks to sell. It's just more fun to try to pick the stocks that can generate big returns instead of delivering depressing losses. But sometimes it's necessary to identify the stocks to sell so that you have cash freed up to buy more promising stocks.
My view is that there are quite a few marijuana stocks that are good picks to buy that should be winners in the new year. However, some are more likely to be losers. Here are two pot stocks that I think it makes sense to sell before 2021.
If you've owned shares of Aurora Cannabis (ACB 5.48%), selling before the end of 2017 would have been your best move. It's been mainly downhill for the Canadian cannabis producer since then. Aurora really flopped in 2020, with the stock plunging more than 60%.
But could better days be ahead for Aurora? After all, the company has a new management team in place now. It's cut costs dramatically. Aurora has even maintained in recent months that it was on track to report positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in its next quarter.
Note the use of the past tense there. The company backpedaled on this goal in an update on Dec. 16. Aurora now only expects to post an improved adjusted EBITDA loss in its fiscal 2021 second quarter. It attributed the delay to a strategy of investing in a "back to basics" strategy and "the unpredictability of the current demand environment."
Aurora definitely needs to do something to turn things around. Reducing expenses was necessary for Aurora, but what it really needs is to return to strong sales growth. In the company's latest quarterly update, Aurora actually lost ground in the important Canadian recreational marijuana market.
Maybe Aurora's change in strategy will work. However, count me as pessimistic at least for now. There simply aren't enough compelling reasons to hang onto this sinking stock when there are other alternatives with strong financial positions and tremendous growth prospects.
Emerald Health Therapeutics
Compared to Aurora, Emerald Health Therapeutics (EMHT.F) has been a big winner this year. But that's only because Aurora's performance stank so much. Emerald Health stock is still down more than 30% in 2020.
There's one positive for Emerald Health. The company now has a pretty healthy balance sheet after selling its stake in Pure Sunfarms to its former partner, Village Farms (VFF -3.65%). However, that deal also means that Emerald no longer can participate in Pure Sunfarms' growth in the Canadian recreational marijuana market.
It also leaves Emerald Health as a much smaller player. My view is that it'll be more challenging to compete against larger rivals in the future than it's been in the past.
The company generated net revenue of only CA$3.37 million in the third quarter. More importantly, it posted a net loss of nearly CA$11.7 million. I don't see a clear path to profitability for Emerald.
And that leads to arguably the biggest reason to sell the stock. Emerald received CA$60 million in cash from Village Farms plus a promissory note of CA$19.9 million payable soon. However, unless the company manages to make significant bottom-line improvement, its cash will run out within the next couple of years. Before it gets to that point, Emerald would probably have to raise additional capital by issuing new shares -- which would cause the stock to fall even more.
I'm not saying that it's impossible for Aurora Cannabis and Emerald Health to deliver gains for investors next year. It could happen. What I am saying, though, is that there are other marijuana stocks that offer much better chances of winning in 2021.
In particular, my view is that U.S. pot stocks provide more attractive prospects. If you're hoping to profit from the cannabis boom, there are some fast-growing U.S.-based stocks that are much more appealing picks than either Aurora or Emerald.