Over a two-year span, investors have watched marijuana stocks go from the buzz of Wall Street to nothing short of a buzzkill. When Democrats took control of both houses of Congress in 2021 and President Joe Biden ascended to the Oval Office, it was believed that cannabis reform was likely. Two years later, marijuana remains illegal at the federal level and cannabis banking reform measures continue to stall in the Senate.
But this lack of progress at the federal level hasn't dimmed the long-term hope for the industry. According to BDSA, worldwide cannabis sales are expected to nearly double from $30 billion in 2021 to $57 billion by 2026. That makes cannabis one of the fastest-growing industries on the planet.
Image source: Getty Images.
Unfortunately, not every company associated with next-big-thing investments turns out to be a winner. What follows are three pot stocks investors would be wise to avoid like the plague in 2023.
Aurora Cannabis
The first marijuana stock that has no business being in investors' portfolios in the new year is Canadian licensed producer Aurora Cannabis (ACB -2.72%).
It's almost hard to believe that just four years ago Aurora Cannabis was talked about as potentially becoming an international weed juggernaut, with peak production capacity (assuming all 15 of its properties were built out) of more than 600,000 kilograms of dried flower per year. Of course, with hindsight being what it is, investors now know that Aurora Cannabis grossly overestimated domestic and export demand.
Some of Aurora's growing pains aren't its own doing. Canada's most populated province, Ontario, was working with an inefficient lottery system to assign retail dispensary licenses for years. Post-legalization issues like this, coupled with Canadian consumers gravitating toward lower-margin dried flower, has been a bad combination for the once highflying Aurora Cannabis.
But make no mistake: Aurora had plenty of miscues of its own. The company grossly overpaid for about a dozen acquisitions, which eventually led to billions of dollars in goodwill write downs. Further, it's been unable to reduce its expenses anywhere near enough to move the company to profitability. Though Aurora claims to be on track for positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), this isn't the same as becoming profitable or generating positive cash flow. With little traction in Canada's adult-use cannabis market, Aurora looks to be years away from any chance at recurring profitability.
But the glaring problem with Aurora Cannabis is that it's become a serial diluter. A number of poor strategic decisions crushed the company's balance sheet. As a result, it's been issuing stock and convertible debt to fund its operations for years. In a little over eight years, Aurora's outstanding share count has ballooned from a reverse split-adjusted 1.3 million to about 300 million. Shareholders have no chance to thrive when a company is burning cash and burying them under newly-issued shares.
With Aurora Cannabis once again at risk of needing a reverse split to avoid delisting from the Nasdaq exchange, it has all the hallmarks of a pot stock to avoid in 2023.
SNDL
The second pot stock that investors would be wise to avoid like the plague in 2023 is SNDL (SNDL -1.93%), the company that was known as Sundial Growers until this past July.
SNDL, like Aurora, is a Canadian cannabis company that had visions of grandeur following the legalization of recreational weed in October 2018. Following its debut as a publicly traded company in 2019, SNDL quickly ramped up its wholesale cannabis operations. Though wholesale cannabis produces lower margins than traditional retail operations, SNDL's sales were growing. Then everything changed.
In 2020, the company's management team made the decision to shift its focus away from wholesale cannabis to the higher-margin retail side of the equation. This meant starting from scratch and effectively building from the ground up. Years later, SNDL's cannabis operations are still menial. On an annual run-rate basis (based on third-quarter sales), SNDL is pacing just 66 million Canadian dollars ($49.3 million U.S.) in cannabis sales.
The bigger problem for SNDL is that its management team undertook a campaign to completely pay off the company's outstanding debt in 2020. While paying off debt would generally be a positive, SNDL's execs opened the spigot and began issuing stock to raise capital. That spigot wasn't turned off for more than a year. Instead of simply wiping out the company's debt, SNDL transformed itself into something similar to a special purpose acquisition company (SPAC). In a span of two years, SNDL's reverse split-adjusted share count catapulted from just shy of 51 million shares to 236 million. Like Aurora Cannabis, SNDL drowned its shareholders in dilution.
Although SNDL has used its capital to acquire a number of other businesses, including Alcanna, which made it Canada's largest private sector liquor retailer, the money that management raised on the backs of its shareholders had no immediate purpose. In other words, management raised capital aimlessly without a plan. Now, almost comically, it's undertaken a token share repurchase program after diluting its investors into smithereens.
Whether SNDL can make all of the puzzle pieces it's acquired fit together into a profitable picture remains to be seen. What is clear is that management has done a terrible job for its shareholders, which is why SNDL is an easy stock to avoid in 2023.
Image source: Getty Images.
Canopy Growth
The third and final pot stock to avoid like the plague in 2023 is Canopy Growth (CGC 0.89%). You'll note all three marijuana stocks to avoid are, indeed, Canadian licensed producers.
Canopy Growth and Aurora Cannabis were essentially neck-and-neck in 2019 and seemingly poised to dominate the Canadian adult-use landscape and international medical marijuana exports. But as noted, things didn't go as planned. Since then, Canopy Growth has divested assets and scrambled to reduce its expenses. While it's made headway reducing its once unsightly share-based compensation, the company's selling, general, and administrative expenses are keeping Canopy firmly in the red.
But it's not just expenses that are holding Canopy Growth down. The company made a number of acquisitions that it ultimately overpaid for, resulting in CA$1.77 billion ($1.32 billion U.S.) in write downs and impairment charges through the first six months of fiscal 2023.
Canopy Growth's cash situation isn't what it once was, either. At one point, following a multibillion-dollar equity investment from spirits giant Constellation Brands, Canopy had in excess of $4 billion in its war chest. As of the end of September 2022, the company's combined cash, cash equivalents, and short-term investments position had dwindled to $855 million. This means the company has a net debt position after it was absolutely swimming in billions of dollars of cash just four years ago. With net losses continuing, I'd expect this once-robust cash position to further shrink.
Lastly, Canopy Growth, Aurora Cannabis, and SNDL have no organic opportunity to enter the U.S. market in 2023 -- or 2024, for that matter. Despite calls for cannabis reform among the public, Republican lawmakers in Congress are generally not in favor of legalization. President Biden is also opposed to nationwide cannabis legalization. Although Canopy has a strategic plan to enter the U.S. via acquisitions and divest some of its Canadian retail operations, the logistics of such a move could take a long time to play out.
In short, Canopy Growth is stuck with Canada's underperforming, hypercompetitive, low-margin-driven adult-use cannabis industry.
