Though most investors are laser-focused on tech stocks, it's actually cannabis that could be one of the greatest growth trends of the 2020s.

According to New Frontier Data, the U.S. pot industry is expected to average an annual growth rate of 21% between 2019 and 2025, ultimately hitting more than $41 billion in sales by mid-decade. Meanwhile, BDSA anticipates Canadian pot sales will more than double from $2.6 billion to $6.4 billion between 2020 and 2026. And let's not forget that Mexico is on the cusp of recreational legalization. All told, North America could become a $50 billion weed market by the midpoint of the decade. That's an investment opportunity not to be ignored.

However, history also tells us that not every company in a next-big-thing industry will be a winner. As the marijuana industry has matured, the line between the haves and have-nots have become more discernable.

As move into May, the following three pot stocks stand out as those that should be avoided like the plague.

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

Image source: Getty Images.

Sundial Growers

Since the inclusion of Canadian licensed producer Sundial Growers (NASDAQ:SNDL) on April's "avoid like the plague" list, its shares have declined by another 22% and dipped below the $1 minimum listing requirement to remain on the Nasdaq exchange. Even now, with the company close to 80% below its intraday highs set earlier this year, it's still grossly overvalued given how little it's shown to Wall Street and investors.

Part of the problem for Sundial is that the Canadian rollout of legal cannabis has been a disaster. Health Canada delayed approving cultivation and sales licenses, and pushed back the launch of higher-margin derivatives, such as edibles and vapes, by a couple of months. Meanwhile, provincial regulators in key provinces like Ontario have struggled to approve dispensary licenses in a timely manner.

However, most of the weight of Sundial's poor performance falls on the shoulders of the company's management team. Wanting to pay down the company's debt, Sundial's management team began drowning existing shareholders in common stock issuances, debt-to-equity swaps, and warrants in the fourth quarter of 2020. In a five month stretch (Oct. 1, 2020 – Feb. 28, 2021), Sundial's outstanding share count rose by 1.15 billion.

Guess what? Sundial's management team still isn't done drowning its shareholders in dilution. In March, the company filed a prospectus that could see up to $800 million in additonal capital raised via at-the-market offerings. Based on Friday's close, this could add up to 926 million more shares. Sundial might be sitting on a large cash pile, but the company's management team has no concrete plans for it.

And if you needed one more solid reason to avoid Sundial Growers, consider that the company abandoned its wholesale operating model in favor of a higher-margin retail model. This transition has led to substantial year-over-year sales declines and some unsightly writedowns. I don't mince words when I say that Sundial is the worst marijuana stock your money can buy.

An up-close view of a cannabis plant growing in an indoor commercial cultivation farm.

Image source: Getty Images.

HEXO

The second marijuana stock to avoid like the plague in May is yet another Canadian licensed producer, HEXO (NYSE:HEXO).

Unlike Sundial, HEXO has been able to put together some reasonably positive operating developments of late. The company's fiscal second-quarter operating results, ended Jan. 31, 2021, showed adult-use net sales rose 10.5%, along with the company eking out positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). A lot of key metrics showed improvement from the prior-year period and the sequential quarter. 

So, why avoid HEXO? To begin with, it's drowning its shareholders in dilution much the same way Sundial is, albeit to a lesser degree. Following multiple at-the-market offerings HEXO's share count more than doubled between mid-2019 and the end of 2020. Things could get markedly worse with the company filing for a mixed-shelf prospectus valued at up to $1.2 billion Canadian ($976.4 million). Although HEXO's management team reassured investors that this offering is for financial flexibility purposes, CA$1.2 billion represents 120% the value of the company's current market cap! 

I'm also not a big fan of HEXO's announced all-share acquisition of Zenabis Global. HEXO sells the deal by proclaiming that Zenabis gives it instant access to Europe's medical marijuana market, first-year synergies of up to CA$20 million, and more than 111,000 additional kilos of production capacity. But do you remember what happened the last time HEXO made a splashy deal? Not long after acquiring NewStrike Brands, HEXO shuttered and sold the Niagara production facility, which simply wasn't necessary. It ultimately wrote down virtually the entire value of the deal. Once again, HEXO looks to be overpaying for a struggling business. 

The icing on the cake is that, even with positive adjusted EBITDA, HEXO remains a ways away from generating an actual profit (at least without the aid of fair-value adjustments). It's a forgettable name in an otherwise rapidly growing industry.

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

Image source: Getty Images.

Aurora Cannabis

Last, but not least, the marijuana stock that's become a fixture on this list, Aurora Cannabis (NASDAQ:ACB).

It's hard to believe, but Aurora Cannabis was the most-held stock on online investing app Robinhood for many months prior to its reverse split in May 2020. At one time, it was also expected to lead all pot stocks in annual weed output. But oh how times have changed.

Long before Sundial was destroying shareholder value, Aurora Cannabis was the king of dilution. Between the midpoint of 2014 and late March 2021, the company's share count, on a split-adjusted basis, rose from about 1.3 million to 198 million. Had Aurora not executed a 1-for-12 reverse split, its 16 million outstanding shares in 2014 would be almost 2.4 billion today.

Like Sundial and HEXO, Aurora Cannabis may not be done pulling the rug out from beneath its investors. It, too, filed a $1 billion mixed-shelf offering in March. Though this doesn't guarantee the company will issue shares, its history tells us all we need to know. If fully executed, Aurora's share count could balloon by another 57%. 

The even bigger issue here might be Aurora's lack of operational execution. International sales, which should have been the company's bread-and-butter out of the gate, have lagged badly. Meanwhile, forecasts of positive adjusted EBITDA have been pushed further down the line on multiple occasions. That's worrisome considering the company's debt covenant is tied to it reaching positive adjusted EBITDA.

Aurora Cannabis may be popular among young and/or novice investors, but it's shown nothing to merit serious investment. This cannabis stock should be avoided at all costs as long as management continues its nonstop dilutive tactics.

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.