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3 Pot Stocks to Avoid Like the Plague in April

By Sean Williams - Apr 5, 2021 at 6:06AM

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Buy these cannabis stocks, and your money is likely to go up in smoke.

This could very well be the decade that has cannabis investors seeing green.

In the U.S., pot sales are expected to grow by an annualized rate of 21% through 2025, according to New Frontier Data. Meanwhile, marijuana-focused analytics company BDSA is counting on Canada's weed revenue to more than double to $6.4 billion by 2026. All told, the North American pot industry could be bringing in $50 billion a year by the middle of the decade.

However, one of the constants of next-big-thing investments is that not every company can be a winner. The cannabis industry is highly competitive, and quite a few businesses simply aren't in great shape. As we move headlong into April, the following three pot stocks stand out like a sore thumb as those investors should avoid like the plague.

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

Image source: Getty Images.

Sundial Growers

After recently referring to Canadian licensed producer Sundial Growers (SNDL -5.50%) as the "absolute worst marijuana stock money can buy," it should come as no surprise that it's a no-brainer avoid in April.

The bulk of Sundial Growers' gains since the year began are the result of the Reddit frenzy. Without (pardon the pun) getting too far into the weeds, retail investors on Reddit's WallStreetBets chat room have essentially banded together to buy shares and out-of-the-money call options in stocks with high levels of short interest. The goal for these predominantly young retail investors is to create a short squeeze -- i.e., an event where pessimists hoping for a share price decline feel trapped by a rapidly rising stock and rush for the exit. Sundial underwent a short squeeze two months ago, but has since tailed off.

Optimists in Sundial will also point to the company's $719 million Canadian ($571 million U.S.) in cash and no debt as part of the buy thesis. However, this capital was raised by diluting the daylights out of existing shareholders. This is a company that had 509 million shares outstanding on Sept. 30, 2020, but was lugging around 1.66 billion shares five months later. A combination of share offerings, debt-to-equity swaps, and warrant exercising drove its share count into the stratosphere.

Think about this for a moment: With 1.66 billion shares outstanding, the company would need to generate close to $25 million in net income just to produce a rounded-up $0.02 per share profit. Because Sundial is one of the slowest-growing marijuana stocks, it's not expected to become profitable until 2023, or top $0.01 in per-share earnings when it does become profitable. Wall Street also isn't counting on $100 million in sales until at least 2024.

What's more, the company's outstanding share count is going to make delisting a constant threat. Sundial's only true asset is its cash, which equates to just $0.34 per share. Above $0.34, investors are purely speculating on a company that's losing money and has no defined game plan.

Suffice it to say, Sundial really is the worst pot stock money can buy.

A large cannabis dispensary sign in front of a retail store.

Image source: Getty Images.

MedMen Enterprises

In terms of worst U.S. marijuana stock, multistate operator MedMen Enterprises (MMNFF -4.15%) would be in strong contention.

MedMen is a penny stock, and retail investors love penny stocks almost as much as they love a good short squeeze. With cannabis stocks soaring earlier this year after Democrats won back the U.S. Senate by the narrowest of margins, MedMen caught fire. The prospects for cannabis reform at the federal level proved more than enough for speculators to dive in. However, with shares of the company up nearly 200% year-to-date, it's pretty hard to overlook how poorly MedMen has been run.

This is a company that tried to be one of the premier national players, but its previous management team was far too overzealous. MedMen was forced to back out of its PharmaCann acquisition in October 2019, a year after it was announced, and it's been scrambling to cut costs and control its cash burn ever since. Even with significant cost-cutting, MedMen is nowhere near profitability and its funding situation is precarious, at best.

According to the company's fiscal second-quarter results (ended Dec. 26, 2020), it had just $7.5 million in cash, yet lost $68.9 million for the quarter, including a $24 million tax provision expense. Worse yet, revenue was flat from the sequential quarter (up 0.3%). 

Even with a handful of supportive capital partners, MedMen has turned to direct share offerings to raise cash. In February, the company sold $5.8 million shares at $0.3713, with accompanying warrants that can be exercised at $0.4642. A month later, it sold another CA$20 million at CA$0.40. These shares also came with warrants. The point is, MedMen's only hope of survival looks to be to dilute its shareholders. And should the company survive, the potential exercising of these warrants will severely hamper its upside. 

A blank paper certificate for shares of a publicly traded company.

Image source: Getty Images.

Aurora Cannabis

Finally, as if there was any doubt, Canadian licensed producer Aurora Cannabis (ACB -5.50%) takes its regular spot on the avoid list.

Aurora generated a bit of buzz during the Reddit frenzy in the first quarter, but didn't have the right factors in place -- its short interest wasn't high enough, and its large daily volume made short covering easy -- for a sustained short squeeze. It was also buoyed by the hope of cannabis reform in the U.S at the federal level. Aurora won't enter the lucrative U.S. market until the federal government legalizes cannabis.

But the big issue with Aurora has always been its complete disregard for improving shareholder value. It's been leaning on selling its common stock to fund its day-to-day operations, and has used its shares as collateral for its roughly one dozen acquisitions over the past five years. Between June 2014 and the end of 2020, Aurora's share count rose by more than 13,500%!

And just like Sundial, Aurora Cannabis isn't done yet. Less than four weeks ago, the company filed a shelf prospectus that would allow it to sell a combination of shares, warrants, or debt securities over the coming 25 months totaling (drum roll) up to $1 billion. If Aurora does sell up to $1 billion more in stock, we could be talking about its share count rising from 1.35 million in June 2014 to potentially close to 300 million. 

The company's management hasn't inspired confidence, either. Aurora's finish line to hit positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) has been pushed back a number of times. Since hitting positive EBITDA is a requirement of the company's debt covenant, this failure isn't something that can be swept under the rug.

As has been the case for years, Aurora Cannabis is firmly in the avoid column.

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Stocks Mentioned

Aurora Cannabis Stock Quote
Aurora Cannabis
$2.92 (-5.50%) $0.17
MedMen Enterprises Stock Quote
MedMen Enterprises
$0.09 (-4.15%) $0.00
Sundial Growers Inc. Stock Quote
Sundial Growers Inc.
$0.41 (-5.50%) $0.02

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