Although it's had its ups and downs, cannabis is forecast to be one of the fastest-growing industries over the next five years. According to cannabis-focused analytics company BDSA, global marijuana sales are projected to hit $62.1 billion by 2026, representing a doubling from the estimated $31 billion believed to have been sold globally in 2021.
However, not all marijuana stocks are going to be winners. While the industry is full of promising growth stocks, some of which are already achieving recurring profitability, the following four pot stocks, all of which have a Canadian focus, should be avoided like the plague in 2022.
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Aurora Cannabis
The award for the most times a pot stock has appeared on a "stocks to avoid list" unquestionably goes to Canadian licensed producer Aurora Cannabis (ACB -6.81%).
Once upon a time, Aurora was the premier name among Canadian weed stocks. It had 15 production facilities globally and looked to be on pace for well over 600,000 annual kilos of cannabis output when fully operational. However, Aurora's previous management team badly miscalculated the demand ramp-up in Canada's recreational weed market following legalization, as well as the company's international opportunity. Aurora has since closed a number of facilities and even sold others to reduce its operating expenses.
Another issue for Aurora Cannabis is its history of grossly overpaying for acquisitions. Despite already recognizing billions of dollars in write-downs, the company is still lugging around 888.4 million Canadian dollars (about $699 million) in goodwill on its balance sheet. This is effectively premium Aurora paid that it may never recoup -- and it accounts for 35% of the company's total assets.
But the prime reason to avoid Aurora Cannabis is its persistent history of share-based dilution. The company made a habit of funding its acquisitions with its stock as collateral. It's also been issuing shares throughout the years to build up its cash reserves since the company is still losing money and gaining no traction in the Canadian recreational weed space. Since mid-2014, Aurora's share count has ballooned from a reverse split-adjusted 1.3 million shares to north of 198 million.
There are plenty of great pot stocks to choose from. Aurora isn't one of them.
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Sundial Growers
Back in March 2021, I labeled Sundial Growers (SNDL -2.50%) the "absolute worst marijuana stock money can buy." Since then, Sundial's shares have fallen 57%. While its downside is likely limited by its large cash balance, there's simply little upside with a pot stock whose management team lacks direction.
Throughout most of 2020, Sundial Growers was trying to be a traditional cannabis wholesaler. Unfortunately, the margins associated with wholesale marijuana are considerably smaller than that of retail cannabis. Though the company eventually decided to switch things up and focus on retail cannabis, it didn't work out too well given that it was forced to build its retail presence from the ground up. The result has been consistent losses from its cannabis operations, excluding a number of one-time benefits and derivative revaluations.
The far bigger concern here for investors is the constant share-based dilution. Initially, management planned to issue shares during the fourth quarter of 2020 to pay off the company's debt. However, those share issuances haven't stopped. Though the cash raised has allowed Sundial to become something like a special-purpose acquisition company (SPAC) in the cannabis space, there's been no clear explanation as to why management kept issuing shares. Between Sept. 30, 2020, and Nov. 9, 2021, Sundial's share count rose from 509 million to roughly 2.1 billion.
With this many shares outstanding, Sundial has virtually no hope of generating meaningful earnings per share, or likely even remaining listed on the Nasdaq exchange without a reverse split.
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Cronos Group
To keep the "Canadian marijuana stock to avoid" theme alive, the third company to shy away from in 2022 is Cronos Group (CRON 0.81%).
Cronos was another Canadian pot stock that was expected to do no wrong. In March 2019, it closed an equity investment totaling $1.8 billion from tobacco giant Altria Group (MO 1.45%), giving Altria a 45% stake in the company. The expectation was that this cash hoard, coupled with Altria's vast bank of knowledge when it comes to developing and marketing products, would make Cronos an instant success. However, those hopes have faded.
Altria has seen the value of its investment in Cronos Group dwindle due to a few factors. This includes Cronos' sluggish expansion in Canada, multiple miscues from Canadian federal and provincial regulators, and the United States' inability to legalize cannabis at the federal level. Altria is counting on federal legalization to pave a path for Cronos to enter the U.S. market.
Even more worrisome, Cronos Group filed Form 12b-25 with the Securities and Exchange Commission in early November. This form is used by publicly traded companies that are unable to file their financial statements on time (in this case, the company's third-quarter operating results). Cronos noted that it would be taking a goodwill charge of at least $220 million, which would be in the neighborhood of three-quarters of the value it paid for the Lord Jones cannabidiol brand of beauty products. In short, the company grossly overpaid for its one large acquisition.
Like Sundial, Cronos is sitting on plenty of cash, but it remains unprofitable on an operating basis and lacks any clear catalysts.
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Canopy Growth
The fourth and final pot stock to avoid like the plague in 2022 is yet another Canadian cannabis darling: Canopy Growth (CGC -3.01%).
Similar to Cronos and Aurora Cannabis, Canopy looked like a shoo-in for success after nabbing four combined direct and indirect equity investments from spirits giant Constellation Brands. At one point, Canopy had in the neighborhood of CA$5 billion in cash on its balance sheet. The expectation was for Canopy to use this capital to push into new markets (including the U.S., when federally legalized), as well as for Constellation Brands to aid Canopy with product development and logistics. But little has worked out as expected.
Due to dispensary licensing issues and the coronavirus pandemic, the ramp-up of recreational cannabis sales in our neighbor to the north has been a mess. Consumers have predominantly flocked to value cannabis products. This means that even though Canopy Growth has the leading share of Canadian weed sales, it's struggling to lift margins in a space where consumers are seeking out value brands.
Just as unnerving is Canopy's balance sheet, which featured CA$2 billion in goodwill at the end of September. This is a company that loves acquisitions -- and apparently loves overpaying for them. This CA$2 billion in goodwill represents 31% of the company's CA$6.49 billion in total assets.
And if you need one more solid reason to stay away, consider that Canopy Growth is still losing money and has continued to kick its target date for positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) down the road for years. The fact is that Canopy Growth is still burning through its remaining cash and should be avoided.
