The AdvisorShares Pure US Cannabis ETF (NYSEARCA:MSOS) has surged by nearly 30% year-to-date, showcasing the rejuvenated demand for cannabis stocks. Salient to the ETF’s year-to-date performance has been the increased popularity of high-beta securities. Moreover, many anticipate that marijuana will soon be downgraded to a Schedule II category substance from its current Schedule I status, lending the opportunity for a broader end market.
Although cannabis stocks possess tailwinds, the stock market is mean-reverting by nature. Therefore, a short-term pullback is likely, especially given the overzealous reaction by investors to interim variables. In addition, a disinflationary economy is set to decelerate nominal earnings and potentially give rise to credit spreads when interest rates pivot.
With the aforementioned in mind, here are three overhyped cannabis stocks to sell before it’s too late.
Curaleaf Holdings (CURLF)
Curaleaf Holdings (OTCMKTS:CURLF) stock has surged by approximately 25% year-to-date after being galvanized by systemic support. However, data shows sentiment is about to shift. While remaining above its 50-, 100, and 200-day moving averages, CURLF stock has slipped below its 10-day moving averages and concurrently built up short interest of $22 million, more than double the amount in February last year. On top of that, CURLF’s price multiples are sluggish relative to its peers. For example, the stock’s enterprise value to earnings before interest and tax ratio of 74.36x is 335% higher than the sector average, indicating that little relative value is in-store.
Let’s delve into a qualitative overview point of Curaleaf to add substance to the data points above.
Curaleaf released its third-quarter results in November 2023, revealing a revenue miss of $7.05 million and an earnings-per-share miss of 3 cents. After accounting for discontinued operations, the firm’s net revenues declined by about 1% year-over-year. Slowing growth will likely be sustained into 2024. Although new product lines may enhance real retail revenue growth, Curaleaf’s nominal earnings outlook could face disinflation and flimsy consumer sentiment.
Furthermore, Curaleaf announced earlier this month it agreed to acquire Can4Med, a “pharmaceutical wholesaler specializing in cannabinoid medications in Poland.” Even though a growth-by-acquisition strategy can add value, it isn’t an ideal time for Curaleaf to acquire en masse. The company’s quick ratio of 0.28x shows that its solvency is borderline. Thus, an economic downturn could stun Curaleaf’s balance sheet, leaving its shareholders to pick up the pieces.
I’m staying away from CURLF stock for now!
Ayr Wellness (AYRWF)
Ayr Wellness (OTCMKTS:AYRWF) stock has been up by more than 1.45x in the past six months, following robust growth and supportive financial market sentiment. However, I believe it’s time to cash out before it’s too late.
The company should release its fourth-quarter and full-year results next month. I’m extremely worried about what’s in store after Ayr’s management provided a gloomy outlook back in November, stating: “Due to the modest sequential revenue decline in the third quarter, coupled with the temporary cultivation setback in Florida that will impact fourth-quarter revenue by approximately $4-6 million, the company no longer anticipates growth for the second half of 2023 over first half levels.”
In addition to a potential earnings disappointment, Ayr Wellness’ capital structure is problematic. The firm recently extended the maturity of its 12.5% senior notes and LivFree Wellness Promissory notes by two years, consequently onboarding another $40 million in debt. The interest rate on these notes is exorbitant, and I fail to see how a company with an earnings before interest and tax margin of -10.53% is positioned to service such demands. As such, principle-principle issues between Ayr’s Wellness’ debt and equity holders could be en route.
It has to be said that AYRWF is well-placed from a valuation point of view. For instance, its price-to-sales ratio of 0.28x and price-to-book ratio of 0.25x show that it holds absolute value. However, I would avoid this stock until the company resolves its structural issues, especially as an economic decline is near.
Canopy Growth (CGC)
Canopy Growth (NASDAQ:CGC) stock is a downside momentum play. The asset has lost over 80% of its market value in the past year due to various structural issues, such as excessive capital raises and losses.
I fail to see how matters will turn around for Canopy Growth. In fact, the company has filed to sell an additional 16.32 million common shares, which follows its $50 million private placement late last year. The firm’s debt-to-equity ratio of 127.28x is telling of its capital structure concerns. Moreover, Canopy Growth’s -$301.61 million cash from operations and -1.19x return on equity ratio communicate the lack of residual available to its shareholders. Although Canopy Growth narrowed its operating losses to $60 million from $113 a year ago, it hosts a sluggish -10.55% three-year compound annual growth rate and faces a disinflationary environment. Therefore, I find it hard to believe that Canopy Growth’s shareholders will receive bang for their buck anytime soon.
CGC stock is at a cyclical discount if its price-to-sales ratio of 0.92x is relied upon. Moreover, CGC stock’s relative strength index of 39.72 suggests it is borderline oversold. As such, a counterargument does exist. However, an additional share issuance paired with sustained losses would question the validity of the aforementioned data.
On the date of publication, Steve Booyens did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
