As shown by the AdvisorShares Pure US Cannabis ETF's losses of more than 65% in the last 12 months alone, you can easily burn a fortune by investing it in a few of the most popular marijuana stocks. Between frequent mismatches of supply and demand and a stock market that's positively sour on high-risk growth assets like cannabis stocks, now is the time when underperforming companies are getting shaken out.
Avoiding the industry's falling stars is key to preserving your wealth if you decide to enter into the world of cannabis in the near future. Let's look at a trio of cannabis businesses that are likely to demolish an investment of $5,000.
Shopping for edibles at a marijuana dispensary. Image source: Getty Images.
1. Aurora Cannabis
Down by more than 96% in the last three years, Aurora Cannabis (ACB -2.79%) remains a great option for investors who like losing money. While it has many issues, perhaps the most dangerous one for shareholders is its habitual overly optimistic communication style.
For example, Aurora claims to be the Canadian cannabis company with the highest adjusted gross margin, beating the likes of giants like Tilray Brands, (TLRY -0.58%) among others. But, when looking at the non-adjusted gross margins of its competitors, the story is entirely different, as shown below:
ACB gross profit margin (quarterly). Data by YCharts.
Playing accounting games to make numbers look better is, unfortunately, a fact of life in the marijuana industry. And investors should probably avoid buying shares of the companies that paint a picture so distinct from the reality of their past performance. The same goes for overly rosy predictions about future performance.
Aurora's management also holds that it'll have positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by the first half of fiscal year 2023. But its most recent quarterly results show that its non-adjusted EBITDA is actually a loss to the tune of $761 million rather than earnings. Accounting adjustments aside, it's very hard to see how a business with a market cap near $658 million and shrinking quarterly revenue compared to last year could ever grow its earnings by so much in such a short period. And that's one more reason to avoid Aurora.
2. Sundial Growers
Sundial Growers (SNDL 0.54%) is another much-watched cannabis stock that's liable to turn thousands into hundreds, though it's significantly better off than Aurora because it doesn't have any debt. Its trailing-12-month revenue grew by just over 5.9% in the last three years, reaching more than $50.7 million, which is quite slow for competing in a rapidly growing industry like cannabis. In the same period, its trailing-12-month gross profits declined by 100.6%.
The trouble with Sundial is that it doesn't have a clear strategic focus. It sells cannabis products, but it also invests in marijuana companies and owns a major Canadian liquor store chain called Alcanna. Its cannabis retail footprint of 183 stores is the biggest in Canada, and its 171 liquor stores hold the same distinction among private Canadian liquor retailers. So it's paying a tremendous amount of overhead for cultivation facilities, cannabis retail outlets, liquor retail outlets, and distribution to all of the above.
Because its acquisition of Alcanna recently closed, Sundial's foray into liquor is new, and investors don't have a full quarter of performance data yet. But unless you're willing to bet that a marijuana business can suddenly pivot into liquor without missing a beat, stay away from this stock. Its ongoing diversification efforts are quite risky, and they haven't yet borne fruit.
3. Tilray Brands
Unlike the two cannabis cultivators discussed above, Tilray might be resolving its struggles, and that's what makes it particularly tempting. With the largest market share in Canada, over $613.2 million in trailing-12-month revenue, and a thin but positive profit margin, it's almost starting to look like an appealing investment. But much like Sundial Growers, its focus is quite divided, which could be a problem that ultimately tanks its stock price.
Tilray's operations span four continents: North America, Europe, South America, and Australia. In theory, that means that it can grow cannabis in places like Portugal, where it can then export products to other E.U. countries like Germany at a favorable tariff rate. In practice, operating in so many different locales ensures that it needs to keep up with a bevy of different regulations surrounding legal cannabis products.
In turn, that means its markets are fractured. For instance, if it makes a recreational cannabis product in Canada, it can't sell that product via its subsidiary in Germany, where its only legal participation in the market is via medical marijuana. While right now Tilray is growing into its markets despite the inefficiency, as the cannabis industry matures and expands, it could end up losing out to local competitors that don't face the same constraints, and shareholders might get burned badly in the process.
