When a stock looks like it's on sale, the temptation to buy a handful of shares can be high. But if you can keep your desires at bay when prices look low, particularly with less-than-healthy growth stocks, your portfolio will be a lot healthier in the long run.
On that note, there is a pair of cannabis stocks with low valuations that are likely to be tantalizing for investors who want to see their money multiply in value in a short amount of time. Rather than making their shareholders richer, however, both are likely to be poor purchases. Here's why.
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1. Tilray Brands
As the biggest recreational marijuana seller in Canada and the largest medicinal operator in the European Union, Tilray Brands (TLRY -1.90%) is perhaps the most globalized marijuana business in the world.
So it's a bit shocking that its shares are so inexpensive. If there's going to be a business that reaps the benefits of the global growth of the cannabis industry, Tilray is likely to be it. The average price-to-book (P/B) ratio of the S&P 500 is near 4, but Tilray's P/B is 0.4. That means the stock's valuation is so low that its shares are trading for less money than the company would be worth in a bankruptcy liquidation sale of all its assets.
Obviously, with $433.5 million in cash and equivalents at the ready and only $608.9 million in debt, it won't be going bankrupt anytime soon, but the point is that it's priced at a steep bargain.
Unfortunately, the discount is a bit of a trap for the moment. The issue with Tilray is that its growth appears to be slowing at the same time as its margins are deteriorating and its strategic plans appear to be taking longer than expected. In the last three years, its quarterly revenue only rose by 33.7%. And in the last year, quarterly sales actually shrank by around 5%, reaching $144.1 million in its fiscal second quarter of 2023. Its gross margin is now slightly worse than it was in late 2019.
Management hasn't signaled any plans to slash costs to make up for the decline, and it remains unprofitable. That's a bit concerning, but the even bigger issue is that recreational marijuana legalization is stalled in its favored international markets. Therefore, Tilray's 2021-vintage strategic deal with MedMen to enter the U.S. market in the event of legalization remains on the sidelines even though competitors are already encroaching in newly opened state markets.
Tilray's aspirations to sell to new recreational markets in the E.U. are also in limbo, at least for the moment, dashing hopes that countries there would be moving forward with legalization promptly after 2021. With much-awaited catalysts delayed and financial performance deteriorating, it's best to avoid buying shares of Tilray for now.
2. Aurora Cannabis
Aurora Cannabis (ACB -3.23%) is another Canadian cannabis cultivator, and it holds the leading position in its home country's medicinal market, which is a big part of how it was able to bring in CA$61.7 million for its fiscal first quarter of 2023.
In terms of its valuation, Aurora's P/B multiple is 0.7, which puts it at a bit more expensive than Tilray but still firmly in the bargain bin relative to the wider market's average P/B. But it's another case of a stock being cheap because of the headwinds it's experiencing.
Much like with Tilray, it's unprofitable, and despite realizing CA$340 million in cost savings since early 2020, its quarterly net losses aren't trending consistently in the right direction. And its quarterly gross margin has worsened considerably over the last three years, despite the company's strategic transformation plan designed to slash its overhead and take it closer to profitability.
For now, management is working on getting the company to make cash instead of burning it. The issue is that there aren't many effective avenues for doing that in the near term. The Canadian cannabis market is currently experiencing a glut of marijuana that's driving down prices and making it harder for businesses to maintain their margins.
While it might be possible for Aurora to rally in the next few years as the glut resolves and prices rise again, there simply isn't a very strong investing thesis for buying it at the moment as its turnaround is far from guaranteed, and so the risks of a stock purchase are quite high.
