The rollercoaster ride of the cannabis market has left many in the investing world dazed and confused. The sector’s volatility is marked by winds of optimism followed by spells of disappointment. Despite the industry’s volatility, though, hope hasn’t faded for the green gold rush that could follow full legalization. Yet, a nagging concern of overbought cannabis stocks continues to gnaw at savvy investors.
Furthermore, as the Biden Administration nudges toward decriminalization of marijuana, the excitement is palpable. However, many cannabis stocks are teetering on a precarious edge, with a path ahead fraught with major challenges. So, it’s imperative to tread carefully amidst the inherent market risks.
SNDL (NASDAQ:SNDL), once a reputable name in the cannabis sphere as Sundial Growers, has wilted in its original market. In a surprising pivot, the entity gobbled up Alcanna, evolving into a purveyor of spirits with a chain of 170 liquor stores. This rebranding is essentially a retreat from its cannabis roots, as it currently trades under the banner of SNDL, scrambling to staunch the financial bleeding with alcohol sales.
However, SNDL’s fiscal wounds gape wide, with liquor revenues at $151.7 million failing to intoxicate the bottom line into black. The company’s diversification seems less of an innovation and more of desperation, with cannabis sales playing second fiddle to alcohol, contributing to just 37.8% of total sales. Even with this shift, profitability remains as elusive as ever, casting a sobering shadow over the company’s market stance.
Aurora Cannabis (ACB)
Aurora Cannabis (NASDAQ:ACB), once positioned as a cannabis industry titan, presents a grim financial tableau with its profitability numbers steeped firmly in the red. Its paltry gross profit margin stands at a worrying 2.29%, lagging woefully behind the sector’s median at 55.7%. Its EBIT and EBITDA margins stand at a negative 81.29% and 63.84%, respectively, underscoring the chronic inefficiency thesis surrounding its business.
Despite efforts to trim costs and streamline operations, Aurora’s financials continue to be remarkably concerning for its shareholders. The divestment of assets, including its Alcanna stake and a greenhouse in Medicine Hat, has shrunk costs and capacity, casting doubt on its market competitiveness and growth trajectory. Moreover, last year’s expensive equity sale compounds these concerns, diluting shareholder value. Hence, Aurora’s strategic maneuvers, while bold, have yet to forge a path toward robust financial health, rendering ACB shares an unattractive proposition.
Canopy Growth (CGC)
Canopy Growth (NASDAQ:CGC) is one of the most popular names in the Canadian cannabis landscape, which isn’t immune to the financial turbulence shaking the sector. Its foray into the U.S. market, marked by the acquisition of Jetty Extracts, is indicative of its expansionary ambitions. Yet, these moves come at a cost, draining Canopy’s cash reserves to precarious levels. Its balance sheet raises eyebrows with a concerning financial strength rating of 2 out of 10 from GuruFocus. As per its latest report, its current assets balance stands at $666.7 million, an 82% drop from 2019. The path forward seems pinned on capital infusions, but this avenue carries the specter of shareholder dilution. Hence, Canopy’s short-term outlook is likely to be clouded by the need to shore up its balance sheet rather than celebrate market conquests. Thus, it’s among this list of overbought cannabis stocks you might consider selling now.
MedMen (OTCMKTS:MMNFF) was once a shining beacon in the U.S. marijuana retail market is now juggling with uncertainty in a relatively financial landscape. Its strongholds in California and other important states cannot eclipse the shadows cast by past controversies and missteps of its former leadership.
Moreover, the distressing pattern of cash consumption continues unrestricted for MedMen, with the company’s cash reserves dropping at an alarming pace and its assets being liquidated in a desperate bid to stay afloat. Its most recent quarterly report starkly highlights a decline in “cash and cash equivalents” and a substantial $41.1 million in assets earmarked for sale. Consequently, its cash-to-debt ratio is at a worrying 0.02, worse than 95.3% of other companies in its niche.
MedMen’s shares are down almost 100% over the past five years, and investors keen on cannabis-centric portfolios would be well-advised to steer clear of the firm.
Cronos’s (NASDAQ:CRON) current stock trajectory suggests it’s an incredibly risky bet among overbought cannabis stocks. Market analysts are expecting more pain in the upcoming third quarter report, with a year-to-date (YTD) slump of 27% and a staggering five-year plummet of 77%. Moreover, its revenue growth on a year-over-year (YOY) basis is firmly in the negative at -5%, a far cry from its 5-year average at an amazing 91.3%. Additionally, its profitability metrics offer little to cheer for investors, with triple-digit drops in EBIT, EBITDA, and net income margin on a YOY basis.
The company’s valuation doesn’t instill much confidence either. Trading at nearly nine times its trailing twelve-month revenue, making it remarkably overpriced at this point, especially when considering its downtrodden medium-term outlook. In the market’s unforgiving arena, Cronos’s potential cannot eclipse the looming shadows of its current financial distress and operational pitfalls.
Jazz Pharmaceuticals (JAZZ)
Jazz Pharmaceuticals (NASDAQ:JAZZ) wades through murky financial waters despite making meaningful strides with products including Xywav and Epidiolex. The stock’s performance sends a cautionary signal to investors, especially with a significant 17.1% drop in value dilution, overshadowing its recent bump in net income rise to $104.4 million. The liquidity front shows some promise with more than $1.3 billion in liquid assets; however, the looming debt load of over $5.6 billion suggests a heavier financial burden than what meets the eye.
The company’s foray into the marijuana sector through the acquisition of GW Pharmaceuticals is a double-edged sword. It secured the first FDA-approved cannabis-based medicine in Epidiolex; on the other, it came with a hefty price tag, ballooning debt, and the shadow of generic competition. Regulatory complexities and growing market uncertainty, highlighted by emerging alternatives to the drug, weave a complex tapestry of risk that is unlikely to justify the investment. Until Jazz Pharmaceuticals can prove it can navigate these choppy seas, the stock seems to be anchored by remarkable uncertainty.
AdvisorShares Pure Cannabis ETF (YOLO)
Last on the list of overbought cannabis stocks is the AdvisorShares Pure Cannabis ETF (NYSEARCA:YOLO), which aims to capitalize on the burgeoning cannabis industry. Unfortunately, its lackluster numbers tell a cautionary tale, likely to dissuade even the most fearless of investors.
On the dividend front, YOLO’s yield is a paltry 1.02%, falling short of the median ETF yield by a substantial 61%. Its dividend drop is even more alarming, with a 94.83% nosedive in the trailing twelve months. Moreover, YOLO’s 0.88% expense ratio raises eyebrows when compared to the median ETF ratio of 0.48%. The bid/ask spread is another sting at 1.31%, which is over eight times the median, signaling a liquidity labyrinth that is tough to navigate.
Moreover, the stock’s YTD plunge of 25% would unsettle any portfolio, and, along with a three-year loss of 77.91%, is akin to a financial black hole offering little to no upside ahead.
On the date of publication, Muslim Farooque 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.