For cannabis stock investors, April ended in absolute euphoria. The sector has skyrocketed this week.
The rally came on reports that the U.S. Drug Enforcement Agency (DEA) is set to reclassify marijuana’s controlled substance status. Marijuana is currently in Schedule 1, which is the strictest level of regulatory enforcement. This planned reclassification would move marijuana from Schedule 1, alongside drugs like LSD, to Schedule 3, where less serious drugs such as ketamine and anabolic steroids reside.
While this wouldn’t amount to total federal legalization, it’d be a strong step in the right direction for the cannabis industry. This would ease various restrictions and red tape around things such as banking and payments acceptance for U.S. cannabis companies today.
Traders seem to have taken a buy the whole industry approach, indiscriminately bidding up a huge number of pot stocks on the news. However, not all marijuana stocks will benefit equally. These three marijuana stocks to avoid are still in deep trouble, regardless of the recent regulatory news.
Canopy Growth (CGC)
Canopy Growth (NASDAQ:CGC) is one of the longer-running publicly traded cannabis stocks. Shares skyrocketed in 2018 as investors warmed up to a potential boom in the Canadian cannabis market.
Since that point, however, CGC stock has been an utter trainwreck. Shares have fallen from a (split-adjusted) peak of around $500 per share in 2018 to less than $15 today. The company has engaged in an unceasing string of dilution to fund its massively loss-generating operations. Last quarter alone, the company lost $230 million Canadian dollars from operations.
Simply put, the legal Canadian cannabis market never took off to nearly the degree that investors had been banking on. At the same time, entrepreneurs treated the sector as a gold mine, and way too much capital went flooding into the Canadian recreational market leading to a massive supply/demand imbalance.
Despite Canopy’s long track record of unsuccessful operations, traders have given the company yet another chance. Shares have now more than doubled year-to-date following this week’s rally.
However, the company is far more tied to the Canadian than American market making this reclassification catalyst of dubious value to Canopy specifically. Given Canopy’s large operating losses and substantial debtload, more share dilution and a slumping stock price seem likely going forward, despite the recent excitement.
Aurora Cannabis (ACB)
With more than 1,100 employees, Aurora Cannabis (NASDAQ:ACB) is one of the larger companies in the cannabis space. The company has attempted to take a conglomerate approach to the industry, launching a wide variety of operations. Its main divisions are Canadian cannabis, European cannabis, and plant propagation.
The firm has searched far and wide for growth opportunities, going so far as to distribute wholesale medicinal cannabis in markets as far away as Australia, Israel and South America.
For all the company’s efforts, however, it doesn’t have much to show for it. The company generated $198 million of revenues in fiscal year 2020, but the figure fell to $173 million in fiscal year 2023. Simply put, there’s been a massive glut in the cannabis market, pressuring pricing and causing large quantities of inventory pile-up for leading Canadian distributors.
Analysts are hopeful that Aurora will finally return to revenue growth in 2024. Even so, analysts expect the company to keep losing money for the next two years. Given the high level of competition and low profit margins in the industry, ACB stock will have — at best — an uphill climb over the next few years.
Like with Canopy, Aurora shares leapt this week even though Aurora seems unlikely to benefit much even if the U.S. regulatory environment improves.
Flora Growth (FLGC)
Flora Growth (NASDAQ:FLGC) is a small cannabis company attempting to commercialize marijuana cultivation operations in the nation of Colombia.
In theory, this would make for an attractive business model. Thanks to Colombia’s warm climate and cheap cost of labor, it should be much more economical to produce cannabis in Colombia than in cold weather countries such as Canada. Colombia has a successful export industry for cut flowers and tropical fruits, so it was natural to think cannabis could follow a similar trajectory.
However, regulatory matters make it more complicated than that. Not surprisingly, there is a great deal of red tape in moving cannabis across international boundaries. Both Flora and fellow Colombian cannabis company Clever Leaves (NASDAQ:CLVR) have seen their shares utterly implode over the past two years.
That share price beating is well-deserved. In the case of Flora Growth, it managed to lose $54 million over the past 12 months on revenues of $77 million over the same period. Companies tend to not remain in business for long with those sorts of profitability metrics.
In addition to Flora’s operational problems, short sellers have also raised concerns about Flora. A scathing 2021 short seller report noted that Flora acquired its key operating asset in Colombia for a mere $80,000 consideration. The report also highlighted concerns about insiders and the management team at the company.
FLGC stock has collapsed in value since that report — and given the concerns raised and the company’s subsequently sour operational results, it’s worth wondering whether Flora will have any terminal value at all.
On the date of publication, Ian Bezek did not have (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.
