The potential for marijuana legalization in the U.S. generated a lot of excitement in the cannabis industry. The rescheduling of the drug from a Schedule I controlled dangerous substance to a Schedule III drug was a big step forward. But despite promises from politicians, legalization is still no closer to happening.
Marijuana companies really don’t benefit from rescheduling. While it was always ludicrous to classify marijuana the same as heroin, simply recognizing cannabis has medicinal uses won’t convince banks to lend money to marijuana companies.
Legalization is no panacea either. The government will surely heavily regulate and tax cannabis companies. The example of Canada’s botched legalization efforts should convince investors that simply making marijuana legal won’t miraculously change the situation.
While pot stocks may gain access to traditional forms of financing, if they are still running money-losing operations they will not be much better off. For that reason, the following three companies are cannabis stocks to sell regardless of whether we have legal weed or not.
Aurora Cannabis (ACB)
Closeup of mobile phone screen with logo lettering of cannabinoid company Aurora Cannabis (ACB, blurred marijuana leaf (focus on left part of letter R in center)
Source: Ralf Liebhold / Shutterstock.com
Leading medical marijuana producer Aurora Cannabis (NASDAQ:ACB) is the first cannabis stock to sell. Despite having been in business for a decade and having operations in Canada and throughout numerous markets in Europe, Aurora has not yet figured out how to make a profit.
The cannabis stock reported a fourth-quarter loss of $20.8 million Canadian, or $15.2 million. While that was certainly better than the $76.2 million Canadian loss last year, it came on missed revenue expectations. Aurora said it generated revenue of $67.4 million Canadian, up 5% year-over-year, but below expectations of $69.5 million Canadian.
It was also a result of Aurora refocusing its business on the medical marijuana market and away from the consumer market. Because medical marijuana carries higher margins, Aurora is making a concerted push toward profitability. That may be shortsighted in the long run.
The consumer market is far larger than the medical market and could impede any upside potential Aurora Cannabis has. As the pot stock has taken significant cost-cutting measures, it has likely reached its limit. That means Aurora’s business must carry it forward, making ACB stock one to sell.
SNDL (SNDL)
The Sundial Growers logo is on a phone screen with a light blue background in front of the sundial logo on a white background. SNDL stock
SNDL just reported second-quarter results that showed a near-2% decline in revenue to $231.9 million Canadian, leading to losses of of $5 million Canadian. That was also a marked improvement over the year-ago period when it lost $30 million but it is the liquor business and not the marijuana business that is carrying the company.
The problem for SNDL and all other Canadian cannabis stocks is the intense competitive nature of the market. There are too many producers for the legal weed demand. As noted earlier, Canada’s experiment with legalization has been pretty much a failure because of pot stocks were hobbled by regulation.
A report from Deloitte earlier this year showed that legal cannabis is about 10% more expensive than black-market marijuana. At smaller amounts, the delta between the two approached 50%. Deloitte said 3.5 grams of marijuana cost $9 Canadian but your local dealer was offering it at $6.
SNDL also likes to issue stock diluting shareholders. At the end of the second quarter, the cannabis stock had 263 million shares outstanding, which according to Ycharts, is a 2,900% increase from four years ago. It is just one of the reasons SNDL is a cannabis stock to sell.
Cronos Group (CRON)
Even Contrarian Investors Should Hold off on CRON Stock for Now
Despite a $1 billion cash infusion by Altria (NYSE:MO) at the height of the corporate marijuana investment craze, Cronos Group (NASDAQ:CRON) has failed to yield any measurable benefit. That is to either Altria or investors.
As one of the smallest Canadian producers (it also sells in Israel), Cronos has limited ability to achieve any scale. The likelihood of it becoming profitable, even on an adjusted basis, is doubtful, at least not within the next decade.
Cronos generates the lion’s share of its revenue from the Canadian market. As pointed out above, the competitive nature of the marijuana market, the regulatory hurdles in place and Cronos’ relative small size leave it as a bit player.
It exited the U.S. market until legalization actually happens, though it invested in PharmCann giving it an option to get back in should it want. And unlike other cannabis players that have pursued an aggressive acquisition strategy, Cronos has not gone on a spending spree. That does give it a better financial position than most so it hasn’t needed to dilute shareholders like SNDL.
While there is a case to be made for Cronos Group stock, and I recently did that, on the whole, it is much too small to amount to anything more than a niche player in a niche market.
On the date of publication, Rich Duprey held a LONG position in MO stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly orindirectly) any positions in the securities mentioned in this article.
Rich Duprey has written about stocks and investing for the past 20 years. His articles have appeared on Nasdaq.com, The Motley Fool, and Yahoo! Finance, and he has been referenced by U.S. and international publications, including MarketWatch, Financial Times, Forbes, Fast Company, USA Today, Milwaukee Journal Sentinel, Cheddar News, The Boston Globe, L’Express, and numerous other news outlets.
