Despite the remarkable expansion of the cannabis industry in recent years, the sector faced economic challenges, such as overproduction amid persistently high inflation impacting overall demand last year.
With the industry likely to remain under immense pressure this year, struggling cannabis stocks Tilray Brands, Inc. (TLRY), Canopy Growth Corporation (CGC), Cronos Group Inc. (CRON), and Aurora Cannabis Inc. (ACB) might be best avoided now.
In light of the expanding legalization of cannabis and an influx of capital from venture capital firms and other investors, the cannabis industry has grown dramatically in recent years. Despite experiencing a sales boom during the pandemic, the industry has displayed signs of a slowdown as it grapples with various economic and regulatory challenges.
Cannabis companies in the United States and Canada faced industry-wide headwinds, including supply gluts amid high inflation weighing on overall demand. The overproduction impacted wholesale and retail prices in 2022. Like Colorado, Michigan, Oregon, and Washington, adult-use cannabis prices plunged drastically in Massachusetts as the market hit an oversaturation point.
Following more than four years of legalization, Canada’s cannabis industry has come down from its highs. Michael Armstrong, an associate professor of operations research at Brock University in Ontario, said, “Producers have been scaling back, laying people off, closing facilities for really over three years.” Furthermore, Canadian cannabis wholesale prices declined more than 40% last year.
Growing taxes and barriers to interstate commerce, stubbornly high inflation, and high costs for fertilizers and raw materials continue challenging the cannabis industry this year.
Compounding challenges for cannabis firms, which engage in direct dealings with the federally illegal substance, is their current exclusion from major banking institutions. This could be especially difficult for these companies, particularly when meeting payroll obligations, particularly in light of bank failures.
Investor enthusiasm for cannabis stocks has dwindled, evidenced by the AdvisorShares Pure US Cannabis ETF’s (MSOS) 42% decline over the past six months. So, it could be wise to avoid high-risk cannabis stocks TLRY, CGC, CRON, and ACB.
Let’s take a closer look at the fundamentals of these stocks to substantiate why one should avoid them :
Tilray Brands, Inc. (TLRY)
Canada-based TLRY conducts research, cultivates, and distributes medical cannabis products. Its segments include Cannabis Business; Distribution Business; Beverage Alcohol Business; and Wellness Business. It offers medicinal and recreational cannabis, pharmaceuticals and wellness products, and beverage alcohol and hemp-based wellness products.
TLRY’s trailing-12-month gross profit margin of 20.59% is 63% lower than the 55.54% industry average. Its trailing-12-month EBITDA margin of 11.4% compares with the industry average of 3.39%. Likewise, the stock’s trailing-12-month CAPEX/Sales of 2.95% is 36.5% lower than the 4.64% industry average.
For the fiscal 2023 second quarter that ended November 30, 2022, TLRY’s net revenue decreased 7.1% year-over-year to $144.14 million. Its operating expenses increased 4.1% from the year-ago value to $91.92 million. Also, the company’s adjusted EBITDA came in at $11.71 million, a 14.9% decline from the prior year’s period.
Furthermore, the company reported an adjusted net loss and adjusted loss per share of $35.31 million and $0.06, respectively.
TLRY is expected to report a loss per share of $0.06 for the third quarter that ended February 2023. The company’s revenue for the same quarter is expected to decrease marginally from the prior year’s quarter to $150.91 million. Moreover, TLRY missed its consensus revenue estimates in three of the four trailing quarters.
The stock declined 19.5% over the past six months and 53.4% over the past year to close the last trading session at $2.48.
TLRY’s POWR Ratings reflect its bleak outlook. The stock has an overall rating of F, translating to a Strong Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
The stock has an F grade for Momentum and a D for Value and Stability. It ranks last within the D-rated 166-stock Medical - Pharmaceuticals industry.
Click here to see the other ratings of TLRY for Sentiment, Quality, and Growth.
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.
The stock’s trailing-12-month gross profit margin of negative 5.80% compares to the 55.54% industry average. And its trailing-12-month EBITDA margin of negative 93.59% compares to the 3.39% industry average. In addition, the stock’s trailing-12-month asset turnover ratio of 0.09x is 72.2% lower than the industry average of 0.34x.
CGC’s net revenue decreased 28.2% year-over-year to CAD 101.21 million ($73.90 million) in the fiscal 2023 third quarter that ended December 31, 2022. Its operating loss increased 2.5% year-over-year to CAD 153.76 million ($112.27 million). Also, the company’s net loss and loss per share worsened by 130.8% and 92.9% year-over-year to CAD 266.72 million ($194.76 million) and CAD 0.54, respectively.
Analysts expect CGC to report a loss per share of $0.76 for the fiscal year ending March 2023. The company’s revenue for the ongoing year is expected to decrease 21.8% year-over-year to $320.01 million. Furthermore, CGC failed to surpass the consensus EPS estimates in all four trailing quarters, which is disappointing.
The stock has plummeted 39.6% over the past six months and 73.5% over the past year, closing the last trading session at $1.86.
CGC’s POWR Ratings reflect its weak fundamentals. The stock has an overall rating of F, which translates to a Strong Sell in our proprietary rating system.
It has an F grade for Stability, Sentiment, and Momentum. CGC is ranked #163 among 166 stocks in the Medical – Pharmaceuticals industry.
Beyond the POWR Ratings stated above, we have also given CGC grades for Value, Quality, and Growth. Get all CGC ratings here.
Cronos Group Inc. (CRON)
Headquartered in Toronto, Canada, CRON manufactures and markets hemp-derived supplements and cosmetic products via e-commerce, retail, and hospitality partner channels under the Lord Jones brand. It offers dried cannabis, pre-rolls, edibles, concentrates, and cannabis extracts through wholesale and direct-to-consumer channels.
CRON’s trailing-12-month gross profit margin of 13.02% is 76.6% lower than the 55.54% industry average. Its trailing-12-month net income margin of negative 183.60% compares to the negative 6.99% industry average. Furthermore, the stock’s trailing-12-month CAPEX/Sales of 3.76% is 19% lower than the industry average of 4.64%.
CRON’s consolidated net revenue decreased 11.3% year-over-year to $22.89 million in the fourth quarter that ended December 31, 2022. Its gross loss stood at $234,000, compared to a gross profit of $1.94 million in the prior year’s period. Also, the company’s adjusted EBITDA was $21.21 million, a 22.5% decline year-over-year.
Streets expect the company to report a loss per share of $0.04 for the fiscal 2023 first quarter ending March. CRON’s revenue for the current quarter is expected to decline 3.6% year-over-year to $24.08 million. Also, the company missed its consensus EPS estimates in three of four trailing quarters.
Over the past year, the stock has plunged 47.8% to close the last trading session at $1.87.
CRON’s POWR Ratings reflect its poor prospects. The stock has an overall rating of D, equating to Sell in our proprietary rating system.
It has an F grade for Momentum and a D for Value, Sentiment, and Quality. Within the Agriculture industry, it is ranked #22 out of 25 stocks.
To access CRON’s rating for Growth and Stability, click here.
Aurora Cannabis Inc. (ACB)
Based in Edmonton, Canada, ACB manufactures, distributes, and retails cannabis and cannabis-derived goods globally. Additionally, it deals with the wholesale distribution of medicinal marijuana in the European Union (EU). The company also grows and markets dried cannabis, cannabis oils, cannabis capsules, edible cannabis, and cannabis extracts.
The stock’s trailing-12-month gross profit margin and EBITDA margin of negative 13.08% and negative 86.77% compare to the industry averages of 55.54% and 3.39%, respectively. Also, ACB’s trailing-12-month asset turnover ratio of 0.12x is 64.5% lower than the 0.34x industry average.
For the fiscal 2023 second quarter that ended December 31, 2022, ACB’s gross loss came in at CAD 16.17 million ($11.81 million), compared to a gross profit of CAD 5.58 million ($4.07 million) in the year-ago period. Its loss from operations widened 28.3% year-over-year to CAD 71.60 million ($52.28 million). Net loss attributable to ACB and loss per share came in at CAD 65.39 million ($47.74 million) and CAD 0.20, respectively.
For the fiscal year 2023, analysts expect ACB to report a loss per share of $0.31. Moreover, the company’s revenue for the current year is expected to decrease by 21.8% from the previous year to $129.62 million. Also, the company missed its consensus EPS estimates in all four trailing quarters, which is disappointing.
The stock has plunged 52.6% over the past six months and 80.9% over the past year to close the last trading session at $0.66.
It is no surprise that the stock has an overall rating of F, equating to a Strong Sell in our proprietary rating system.
ACB has an F grade for Momentum and Sentiment and a D for Value and Quality. It ranks #162 among 166 stocks within the Medical - Pharmaceuticals industry.
In addition to the POWR Ratings just highlighted, you can see ACB’s ratings for Stability and Growth here.
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TLRY shares were trading at $2.68 per share on Tuesday afternoon, up $0.20 (+8.06%). Year-to-date, TLRY has declined -0.37%, versus a 3.82% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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