Generally speaking, growth for an industry doesn't just blossom overnight. However, that's exactly what's going to happen on Oct. 17, 2018, in Canada, when recreational marijuana officially becomes legal. After selling medical cannabis domestically and exporting some of this product to foreign markets where medical weed is legal, Canada will open its doors to adult consumers in less than three months. In dollar terms, we're talking about vaulting from a few hundred million dollars in yearly sales to perhaps $5 billion annually or more.
With triple-digit sales growth expected from practically all cannabis stocks in the near future, it's no surprise that Wall Street and investors have pushed pot stock valuations into the stratosphere. In many instances, investors could be looking at high double-digit, or even triple-digit, forward price-to-earnings ratios as a result of legalizing adult-use cannabis. While some of these pricey stocks may be able to hold their ground, others look downright dangerous and have found their way onto my “do not buy” list.
To be crystal clear, no stock on my “do not buy” list is cast out forever. As investors, we have to remain objective and review our opinions and investment theses from time to time. But at this very moment, there are three very popular marijuana stocks that I have absolutely no desire to buy.
1. Aurora Cannabis
Though Aurora Cannabis (NASDAQOTH:ACBFF) has no shortage of supporters, and it's arguably done a marvelous job of increase its capacity since the year began, it's one very popular pot stock that I want nothing to do with.
The concerns I have with Aurora Cannabis are twofold. First, the company has grown predominantly through acquisitions and partnerships. Just as with any other industry, I worry that it's going to take longer than expected to integrate all of these new components into one cohesive company.
Along those same lines, Aurora's bought-deal offerings are an absolute eyesore for investors. A bought-deal offering is a means of selling common stock, convertible debentures, stock options, and/or warrants in order to raise capital. Aurora Cannabis turned to bought-deal offerings to raise cash a number of times since 2016. Though this capital was necessary for the company to build the production potential it has today, it also ballooned Aurora's outstanding share count.
2. GW Pharmaceuticals
Now, here's a bit of a head-scratcher: I don't actually dislike cannabinoid-based drug developer GW Pharmaceuticals (NASDAQ:GWPH). On June 25, GW Pharmaceuticals made history by becoming the first company ever to have a cannabis-derived drug (Epidiolex) approved by the Food and Drug Administration (FDA).
But therein lay my two issues with GW Pharmaceuticals.
First, there's the genuine possibility that the company has been priced for perfection. Even with Dravet syndrome having no previously approved FDA therapies, and it having been a while since any new drugs were approved to treat Lennox-Gastaut syndrome patients, GW Pharmaceuticals' $4.2 billion valuation is aggressive.
The other issue here is that it's time as the lone dog in Dravet syndrome may prove short-lived. Last week, Zogenix (NASDAQ:ZGNX) reported outstanding data on ZX008 for Dravet syndrome patients in its second late-stage study.
I struggle to find any further upside in GW Pharmaceuticals at this point, which is why I wouldn't touch this stock.
3. MedMen Enterprises
Finally, MedMen Enterprises (NASDAQOTH:MMNFF), which became the largest U.S.-based pot stock to recently list its shares in Canada, is on the “do not buy” list.
Similar to GW Pharmaceuticals, MedMen's business model isn't one I dislike. The company is angling to normalize cannabis use in the U.S. market across its 16 locations in three states (eight of which are in California, and three of which are soon to be built in Nevada).
But one area of concern I have with MedMen is in the company's need to expand its reach.
Despite generating $8.4 million in sales in the six-month period ending Dec. 31, 2017, the company's prospectus also showed that it produced a $43 million net loss over the same time frame. Chances are high that MedMen Enterprises will continue to lose an exorbitant amount of money as it establishes new stores in select legalized states and makes its play for Canada via a partnership with Cronos Group. In my opinion, this increases the likelihood of a dilutive stock offering being needed at some point in the intermediate future.
For the time being, none of these three popular marijuana stocks are worth your green, in my opinion.
More at: The Motley Fool
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