While the cannabis industry is expanding, it faces several regulatory challenges. Therefore, I think fundamentally weak stocks SNDL Inc. (SNDL) and Canopy Growth Corporation (CGC) might be best avoided now.

The cannabis industry experienced a significant shift in 2022 as recreational and medical marijuana went legal in 39 states. The Medical Marijuana and Cannabidiol Research Expansion Act was signed into law by President Biden.

However, the industry has experienced increased hardship and upheaval since legalization due to regulations and competition from the black market for cannabis. Moreover, oversupply is driving down prices.

According to a recent survey report released by the analytics company Whitney Economics, the cannabis market in the United States is in crisis, with the majority of businesses there battling to stay afloat. Only 24.4% of American cannabis businesses were successful in the fourth quarter of last year, down 41% from the same quarter in 2021.

Heavy government regulation, high-cost structures, and limited access to financing can cause financial difficulty and the subsequent need for industry reorganization. Competition from the illegal market is another aspect contributing to financial difficulties in the cannabis industry.

Let’s delve deeper into the fundamentals of the featured stocks.

SNDL Inc. (SNDL)

Headquartered in Calgary, Canada, SNDL engages in the production, distribution, and sale of cannabis products in Canada. The company operates through four segments: Liquor Retail; Cannabis Retail; Cannabis Operations; and Investments.

Its trailing-12-month gross profit margin of 18.89% is 66.1% lower than the 55.77% industry average. Its trailing-12-month Capex/Sales of 1.24% is 73.6% lower than the 4.67% industry average.

SNDL’s loss from operations amounted to C$32.02 million ($24.23 million) in the fiscal first quarter (ended March 31, 2023), down 38.2% year-over-year. Its net loss amounted to C$36.10 million ($26.90 million).

The company reported an adjusted EBITDA of C$7.40 million ($5.51 million), compared to a loss of C$0.70 million ($0.52 million) in the same quarter in the previous year.

SNDL’s shares have lost 57.3% over the past year to close the last trading session at $1.42.

SNDL’s POWR Ratings reflect this bleak outlook. The stock has an overall rating of F, equating to a Strong Sell in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

SNDL has an F grade for Momentum and a B for Stability and Quality. Within the D-rated Medical - Pharmaceuticals industry, it is ranked #157 out of 166 stocks. Click here for the additional POWR Ratings for Value, Growth, and Sentiment for SNDL.

Canopy Growth Corporation (CGC)

CGC, a Canadian company with its headquarters in Smiths Falls, produces and sells cannabis and hemp-based products for both recreational and therapeutic uses. Its segments include Global Cannabis and Other Consumer Products. The company sells dried cannabis flowers, extracts and concentrates, and vapes, among other things.

CGC’s trailing-12-month asset turnover ratio of 0.10x is 71.3% lower than the 0.35x industry average. Its trailing-12-month Capex/Sales of 2.29% is 51% lower than the 4.67% industry average.

CGC’s net revenue decreased 15.5% year-over-year to C$98.15 million ($74.30 million) for the fourth quarter that ended March 31, 2023. Its operating loss increased 12% year-over-year to C$604.71 million ($457.77 million). Also, the company’s net loss worsened by 9.9% year-over-year to C$640.08 million ($484.54 million).

Street expects CGC’s revenue to decrease marginally year-over-year to $302.29 million for the year ending March 2024. Its EPS is expected to come in at negative $0.56 for the same period. It missed EPS estimates in all four trailing quarters. Over the past year, the stock has lost 79% to close the last trading session at $0.59.

It’s no surprise that CGC has an overall D rating, equating to a Sell in our POWR Ratings system. It has an F grade for Momentum, Stability, and Sentiment and a D grade for Quality. It is ranked #158 in the same industry.

Beyond what is stated above, we’ve also rated CGC for Growth and Value. Get all CGC ratings here.

Is the Bear Market Over?

43 year investment veteran Steve Reitmeister shares his updated stock market outlook & top picks for the rest of 2023. Spoiler Alert: Steve still believes bear case most likely.

Get Stock Market Outlook & Top Picks >

SNDL shares were trading at $1.42 per share on Tuesday afternoon, up $0.05 (+3.65%). Year-to-date, SNDL has declined -32.06%, versus a 16.92% rise in the benchmark S&P 500 index during the same period.

Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.

More...