Beware of These 3 Overvalued Cannabis Stocks

The cannabis sector has been in focus ever since the Democrats won the general elections last fall, with their premise to eliminate more cannabis-usage restrictions. Investors are largely bullish on the sector’s growth prospects. The demand for medical and recreational cannabis has increased immensely during the COVID-19 pandemic and regulators are  likely to soften their stance toward the use of cannabis soon consistent with the White House’s outlook…

Investors have grown increasingly optimistic about the legalization of adult-use marijuana with the Biden administration taking over the governmental reins. This month, senators Chuck Schumer of New York, and Cory Booker and Ron Wyden of New Jersey and Oregon, respectively, stated that they would move forward with an effort to attain federal legalization of marijuana this year.  Cannabis and hemp-based product manufacturers are witnessing a strong momentum on this expectation.

We, too, are optimistic about the long-term prospects of the cannabis sector. However, we also believe that investors must select stocks carefully to ride the sector’s growth. There are many pot companies that are generating losses and face rising debt and weak asset quality. In fact, their financials and growth prospects do not justify the valuations of their stocks.

Tilray, Inc. (TLRY – Get Rating), Aurora Cannabis Inc. (ACB – Get Rating), and Sundial Growers Inc. (SNDL – Get Rating) are three such companies. Their  stocks currently look overvalued considering the weakness of their business operations. Thus, we think investors should avoid these stocks at this juncture.

Tilray, Inc. (TLRY – Get Rating

TLRY is a leading cultivator and seller of medical cannabis globally. In addition to Canada and the United States, the company has operations in the U.K. Argentina, Australia, Germany, Israel, Switzerland and Chile. TLRY also offers its products for to physician for research, as well as to  pharmacies, governments, and hospitals in the clinical and commercial sectors.

During the third quarter, ended September 30, 2020, TLRY’s revenue edged up 0.6% to $51.4 million over the year. Its cannabis segment revenue declined 11% year-over-year to $31.4 million because  bulk sales has been suspended. It also saw a  mild drop in Canadian Medical sales. TLRY’s total cannabis sold fell  53% year-over-year to 5,107 kgs. However, its  net loss per share narrowed to $0.02 from $0.37 in the prior year period.

TLRY’s results are too weak for investors to consider the stock positively. . Its  revenue growth was weak and medical sales  tepid. The company is proceeding in the right direction, but it still has a long way to go to hit  profitability. From a financial perspective, we think the stock is overvalued. Its revenue growth and long-term strength must  justify its pricing because cost-cutting measures cannot go on forever.

Analysts expect revenue for the quarter ended December 31,2020 to be $55.8 million, representing  18.8% year-over-year growth. Its loss per share is likely to narrow 93% to $0.15.

TLRY has climbed 46.2% during the past year to close Friday’s session at $25.72. Over the past six months, the stock rallied 217.14%.

TLRY’s POWR Ratings are consistent with this bleak outlook. TLRY has an overall rating of F, which equates 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.

TLRY has a grade of C for Growth and Momentum, and F for Value, Stability, and Quality. Of 478 stocks in the Medical – Pharmaceuticals industry, it is ranked #2.

In addition to the POWR Ratings grades I have just highlighted, you can see TLRY’s ratings for Sentiment here.

Aurora Cannabis Inc. (ACB – Get Rating

ACB produces and sells medical cannabis, which includes various  strains of dried cannabis, cannabis oil and capsules, as well as topical kits. Daily Special, ROAR Sports, CanniMed, AltaVie, MedReleaf, Whistler, Woodstock constitute its  brand portfolio. In addition, the company sells  accessories such as vaporizers,  consumable vaporizer, valves, screens, and herb mills for consuming its CanniMed products.

During the first quarter, ended September 30, 2020, ACB’s revenue declined 8.2% to $52.7 million. The company is executing rigorous cost cutting.  In its operational note on December 16, ACB indicated its shift to a variable cost structure and the  rolling back of production of some of its products. ACB is seeking to align its production to be aligned with demand for its premium flower.

Hence, it is evident that the company is still…

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