Avoid These 2 Recently Downgraded Cannabis Stocks

Cannabis stocks have generated stellar returns this year, taking full advantage of a growing domestic and  international marijuana market and optimism about the potential for large-scale legalization or decriminalization of marijuana at the federal level. But while the Democrat’s control of the White House and both legislative houses of the U.S. government augers well for most pot producers, the rally in their stocks seems to have lost steam…

As legalization talks sweep the nation, competition in the cannabis industry is also heating up. Amid this  scenario, Wall Street analysts have downgraded Canada based cannabis stocks Canopy Growth Corporation (CGC – Get Rating) and Sundial Growers Inc. (SNDL – Get Rating) because the companies are struggling to stay afloat financially.

Both have had a difficult time increasing their sales and their losses are too high to promise a return to profitability anytime soon. Furthermore,  both the stocks are trading at lofty valuations. Considering these factors, we believe it’s better to avoid them for now.

Canopy Growth Corporation (CGC – Get Rating)

Headquartered in Smiths Falls, Canada, CGC produces, distributes and sells  cannabis for recreational and medical purposes in Canada, the United States, Germany, and the United Kingdom. The company operates through two segments – Cannabis, Hemp and Other Consumer Products, and Canopy Rivers.

This month, CGC launched Quatreau, a premium ready-to-drink CBD-infused sparkling water, in the United States. The company believes that  the new beverage, which is now the top-selling ready-to-drink CBD beverage in Canada, will resonate with U.S. consumers who are looking for a naturally flavored, zero sugar option.

CGC’S net revenue has increased 23.2% year-over-year to C$152.53 million in the third quarter ended December 31, 2020, driven by improved commercial and operational execution. However, the company’s adjusted gross margin declined 500 basis points from its year-ago value to 26%. Its net loss was C$904.38 million, and its loss per share was C$2.43 over this period. Also, its adjusted EBITDA loss was  C$68 million.

The stock is down 19.9% over the past month and is currently trading 40.3% below its 52-week high of $56.5, indicating short-term bearishness. Also, CGC’s forward ev/sales currently stands at 27.88x, 256.1% higher than the industry average 7.83x.

Of the 12 Wall Street analysts that have rated the stock, three rated it “Sell.” CGC’s POWR Ratings are consistent with this bleak outlook. The stock has an overall D rating, which translates to Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

CGC has a C grade for Momentum, D for Stability, and an F for Value. Of the 239-stocks in the F-rated Medical – Pharmaceuticals industry, it is ranked #216.

In addition to the POWR Ratings grades I’ve just highlighted, you can see the CGC ratings for Growth, Quality, and Sentiment.

Sundial Growers Inc. (SNDL – Get Rating)

Incorporated in 2006, SNDL is involved in the production, distribution, and sale of cannabis products for the adult-use market. It sells its products under the brand names Top Leaf, Sundial Cannabis, Palmetto, and Grasslands.

This month, SNDL and SAF Opportunities LP, entered a…

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