Few industries have commanded more interest in recent months than cannabis.
Putting aside the expectation that marijuana will be one of the fastest-growing industries in North America this decade, Wall Street and investors are excited about what’s going on in the political spectrum. Democrat Joe Biden is now president, and Democrats have taken control of the Senate following the Jan. 5 Georgia Senate runoff election. With Democrats having a much more favorable view of cannabis than Republicans…
and Senate Minority Leader Mitch McConnell (R-Ky.) no longer able to block marijuana legislation from reaching the Senate floor for vote, there’s real hope that cannabis reform will occur at the federal level in the U.S.
For U.S. marijuana stocks, legalization could mean the ability to transport cannabis between states, as well as access basic banking services like any other business. Meanwhile, it could allow entry for Canadian pot stocks into the far more lucrative U.S. weed market.
Unfortunately, not all cannabis stocks are going to be winners. As we move into February, I’d suggest avoiding the following three pot stocks like the plague.
As if there were any doubt, Canadian licensed producer Aurora Cannabis (NYSE:ACB) is an absolute fixture of this monthly column.
If there are positives to point out about Aurora Cannabis, it’s that the company’s new management team is taking cost-cutting more seriously. Five of the company’s smaller cultivation facilities were closed last year and two of its largest construction projects were put on hold. When coupled with layoffs and presumed lower per-gram production costs from the ramp-up of larger cultivation facilities, Aurora’s cash burn should be considerably lower in the current calendar year than it was last year.
The reason Aurora Cannabis should remain off-limits for investors has a lot to do with its precarious cash situation. Since the company’s operations continue to result in a net cash outflow, it’s had to sell stock on a regular basis to facilitate acquisitions and cover day-to-day expenses. Since June 2014, Aurora’s outstanding share count has grown by at least 12,200%; and this includes the $125 million bought deal financing arranged last month. This outstanding share count explosion acts like a cement weight that’s holding long-term investors down.
Additionally, both the old and new management team continue to move the goalposts with regard to achieving positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). What’s worrisome is that Aurora’s debt covenant requires the company to hit positive adjusted EBITDA soon. If lenders become weary of readjusting this covenant, the company’s outstanding debt could come due sooner than expected. That’s not ideal for a company that keeps burning through its cash on hand.
For now, the story remains the same. Aurora Cannabis is trimming the fat, but it’s still nowhere near profitability. Marijuana stock investors shouldn’t concern themselves with a company attempting to backpedal into profitability while the rest of the industry is growing by a double-digit rate.
Penny stocks and any public company with high short interest have been especially popular in recent months. That’s why we’ve witnessed Sundial more than quadruple in value since early November. The aforementioned victories by Democrats in the U.S. haven’t…
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