Marijuana projects as one of the fastest-growing industries over the next decade.

According to a recent report by New Frontier Data, cannabis sales in the U.S. are expected to grow by 21% annually between 2019 and 2025, ultimately reaching $41.5 billion by mid-decade. Meanwhile, cannabis industry analytics company BDSA is looking for Canada to generate as much as $6.4 billion in annual weed sales by 2026, up from $2.6 billion in 2020 sales. Add in Mexico, which is now waving the green flag on recreational cannabis, and it's easy to see how the North American marijuana market could hit $50 billion in sales by 2025.

With legal cannabis sales expected to grow by a double-digit annualized percentage throughout the decade, marijuana stocks are a natural favorite among investors.

A clear jar packed with cannabis buds that's lying atop a small pile of cash.

Image source: Getty Images.

Not all cannabis stocks are going to be winners

On the flip side, we also know that not every company involved in a next-big-thing investment will be a winner. If you asked me six months ago to rattle off a list of pot stocks worth avoiding, I would not have struggled to come up with candidates.

Canadian licensed producer Aurora Cannabis (NASDAQ:ACB) has long been a marijuana stock that I've stressed investors should avoid. Aurora's management team has a nasty habit of relying on its common stock as collateral when making acquisitions and funding its day-to-day operations. Between mid-June 2014 and the end of 2020, Aurora's outstanding share count ballooned by more than 13,500%.

To boot, Aurora Cannabis isn't anywhere near profitability, despite some hefty cost-cutting that's seen facilities closed and jobs lost. Management has also pushed its goal of positive adjusted EBITDA down the line on a number of occasions.

And it's not just Canadian licensed producers that can be bad news for investors. U.S. multistate operator MedMen Enterprises (OTC:MMNFF) has emerged as one of the worst-run cannabis companies. MedMen's previous management proved far too overzealous with the company's expansion plans and wrecked its balance sheet. Without capital infusions from Gotham Green Partners, it's unlikely that MedMen would even be solvent today.

Even cash-rich pot stocks would make the list. Despite landing a $1.8 billion equity investment from tobacco giant Altria Group in March 2019, Cronos Group (NASDAQ:CRON) has mostly been a money pit for investors. It looks to have grossly overpaid to acquire the Lord Jones cannabidiol-based beauty brand in 2019, and its cultivation activity is so minimal, relative to its market cap, that it only recently had its first quarter of more than $10 million in net sales.

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

Image source: Getty Images.

This is the unquestioned worst pot stock you can buy

The point is, there are a lot of bad marijuana stocks -- but one stands head and shoulders above the pack. In my view, the absolute worst pot stock that money can buy is penny stock Sundial Growers (NASDAQ:SNDL).

Shares of Sundial, a Canadian licensed producer, are up about 1,000% since late October on three developments. First, there was the victory of Joe Biden in November and the subsequent retaking of the Senate by Democrats in early January. Democrats have a considerably more favorable view of cannabis than Republicans do, making it more likely that we see some sort of cannabis reform enacted at the federal level in the months or years to come. Sundial investors are crossing their fingers for U.S. legalization, which would allow all Canadian growers to enter the U.S. weed market.

Second, investors seem pleased with Sundial cleaning up its balance sheet. As of March 15, the company had 719 million in Canadian dollars (about $580 million) in unrestricted cash. This implies that Sundial has more than enough capital to execute on its growth initiatives. 

And third, Sundial has benefited from being a core holding of the retail-investor-focused Reddit frenzy. It's consistently been one of the most short-sold stocks of 2021, making it a perceived candidate for a short squeeze among Reddit traders.

Though all three of these factors explain why Sundial Growers has tacked on a quadruple-digit gain in six months, they don't come close to justifying the move.

A magnifying glass being held over a company's balance sheet.

Image source: Getty Images.

Before Sundial, I thought Aurora Cannabis was one of the worst serial diluters I'd ever seen, but Sundial takes the cake. Although I'm still waiting for the company's official share count via its annual report filing in Canada at the time of this writing, I'd estimate that, following the exercising of 98.3 million warrants last month, Sundial has at least 1.66 billion shares outstanding. This implies the company increased its outstanding share count by over 1.15 billion shares in roughly five months. I know its CA$719 million cash figure looks attractive, but understand that it's been built by burying its most faithful followers under an avalanche of new stock.

With such overwhelming dilution, here are two things to consider. First, if and when Sundial does turn the corner to profitability, it's going to need to generate CA$17 million in profit (about $13.7 million ) just to produce a single penny in earnings per share. Considering that the company yielded only CA$60.9 million in net sales ($49.1 million) last year, it's highly unlikely that we're ever going to see a meaningful per-share profit from Sundial.

Second, with the company also having a $1 billion mixed shelf offering at its disposal, this dilution is almost assured to continue. The thing to realize is that share price is irrelevant and market cap is what matters. At the moment, we're looking at a company with a $2.6 billion (that's U.S.) market cap that didn't even generate $50 million in net sales last year. Sure, it may have a share price that's perceived to be low. But investors are paying roughly $2 billion (sans cash) for a company that's nowhere near profitable, saw net sales go in reverse in 2020, and continues to dilute its shareholders. In other words, Sundial is a good candidate to once again dip well below the $1 minimum share price required for continued listing on the Nasdaq exchange.

Emotions from young retail investors appear to be the only thing keeping Sundial Growers' stock above $1. If investors were to really dig into this company's operating performance and balance sheet, I'm convinced they'd come to the same conclusion: Sundial is the absolute worst marijuana stock your money can buy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.