Make no mistake: it’s still a time when you should be thinking about which cannabis stocks to sell, not which cannabis stocks to buy. Yes, based on the sheer volume of public comments submitted to the Drug Enforcement Administration (DEA) in support of a proposed rescheduling of marijuana, U.S. cannabis legalization progress seemingly keeps moving in the right direction.
It’s also true that political developments may also bode well for legalization. With Vice President Kamala Harris, far more pro-legalization than President Biden, now the Democratic Party’s candidate for the 2024 U.S. presidential election, it’s possible that a few months from now, a Blue wave leads to renewed speculation about rapid reforms to America’s pot laws.
Still, despite some promise on the horizon, for now, expect poor fundamentals to outweigh this promise in the price performance of the most widely-followed cannabis stocks. These cannabis stocks to sell include not just Canada-based marijuana companies, which are still struggling due to their inability to enter the U.S. market. U.S.-based, state-licensed operators face many issues as well.
Until reclassification becomes official, they must contend with higher income taxes. Irrespective of regulatory changes, they are poised to face further banking challenges.
Aurora Cannabis (ACB)
Aurora Cannabis (NASDAQ:ACB) is one of several major U.S.-listed Canada-based cannabis companies. Shares may be up in recent weeks due to the above-mentioned reclassification news, but over the span of several years, shareholder value has gone up in smoke.
Since 2019, ACB stock has experienced a more than 99% decline in price. During this time, the stock has gone from a split-adjusted $900 per share to around $6 per share today. A big reason for this was heavy cash burn, which led to multiple rounds of dilutive equity raises. Admittedly, Aurora Cannabis has been successful at mitigating its cash burn issue since 2023. On an EBITDA basis, the company is operating at near-breakeven levels. However, don’t assume this means further improvements to fiscal performance are just around the corner.
As InvestorPlace’s Yiannis Zourmpanos recently argued, Aurora’s adjusted gross margins have been slipping lately, falling from 25% to 16% over the past few fiscal quarters. If the company once again reports margin issues in its upcoming quarterly earnings release on Aug. 9, it could spark a new round of concern about Aurora Cannabis’ future prospects. Shares could cough back their reclassification-related gains — and then some.
Canopy Growth (CGC)
Canopy Growth (NYSE:CGC) is another of the Canada-based cannabis stocks to sell. Unable to enter the U.S. market until marijuana becomes fully legal under federal law, Canopy has been in a serious slump for several years. Revenues have steadily declined while operating losses have stayed high.
This has led to continued heavy dilution with CGC stock. At first, this came in the form of capital infusions from a deep-pocketed strategic investor, beverage company Constellation Brands (NYSE:STZ). So far this year, however, the U.S.-based beer and wine giant has all but thrown in the towel on what’s turned out to be a $4 billion bad bet. As a result, the company is now tapping into other funding sources.
Back in June, Canopy Growth launched a $250 million at-the-market program to sell newly-issued CGC shares on the open market. That said, no matter where the company finds fresh capital to sustain operations, what matters for investors is that challenging times are likely to continue. Per sell-side forecasts, the company is expected to report losses of $1.03 per share this fiscal year. That’s a pretty penny, as CGC currently trades for only $6.77 per share.
Curaleaf Holdings (CURLF)
After looking at several Canada-based cannabis purveyors, let’s take a look at Curaleaf Holdings (OTCMKTS:CURLF), one of the largest multi-state operators (MSOs), or U.S. state-licensed, cannabis companies. Headquartered in New York, Curaleaf has operations all across the U.S., including populous jurisdictions like Florida, Illinois and New Jersey.
As I argued last month, numerous factors could cause a pullback for CURLF stock. High debt, for one. Valuation is another. CURLF’s stock price has been largely unchanged since I last wrote about it, and the company continues to trade at a premium to peers on an enterprise value-to-EBITDA (EV/EBITDA) basis. Yes, these factors may not matter much a few months from now if regulatory and political changes lead to another cannabis stock boom.
However, between now and then, these issues could impact Curaleaf’s stock price performance in the near term. The company is scheduled to report earnings on Aug. 7. Investors looking to exit positions could use any negative aspect from the earnings release, whether the results themselves or updates to guidance, as justification to sell. As I put it before, CURLF could be a buy at lower prices, but stay away for now.
Scotts Miracle-Gro (SMG)
Scotts Miracle-Gro (NYSE:SMG) is primarily a lawn and garden care products company, but over the years, through its Hawthorne Gardening subsidiary, SMG has become a major player in the cannabis cultivation space. However, in 2022 and 2023, this $1.7 billion wager has soured.
Hawthorne’s weak performance, coupled with other factors, led to overall declines in revenue and profitability. In turn, that drove a sharp drop in the SMG stock price since 2021. Sure, in more recent quarters, fiscal performance has bounced back. This has resulted in a rebound for SMG shares of nearly 18%. Scott Miracle-Gro’s latest earnings beat resulted in shares hitting a new 52-week high on July 31.
However, following this sentiment shift, SMG now trades for around 21.7 times forward earnings. This represents a big valuation premium to other agricultural input companies. For now, bullishness about legalization could sustain SMG’s current share price. If hope and hype fade, though, it may cause the stock to start moving in the wrong direction once again. Downside risk may be more modest here than, with more speculative pot plays. Nevertheless, you may want to stay away.
SNDL (SNDL)
SNDL (NASDAQ:SNDL), which you may remember from its prior corporate name, Sundial Growers, started off as a Canada-based cannabis pure play. In more recent years, however, the company has diversified. Alongside cannabis cultivation and retail operations, SNDL has made substantial debt and equity investments in other cannabis companies.
For the past years, SNDL has also been a liquor retailing company. Via its 2022 acquisition of Alcanna, the company owns Canadian liquor store chains Ace Liquor Discounter and Liquor Depot as well as beer, wine and spirit retailer Wine and Beyond. Nevertheless, it’s not as if this diversification effort has led to a recovery for shares, which have fallen by more than 97% since 2019.
SNDL’s just-released quarterly fiscal results were mixed at best. Although negative cash flow narrowed, net revenue fell slightly. There is also the expectation that the former Sundial will report positive earnings this year. Shares trade for around 20 times this forecast. However, if the company continues reporting net losses like it did last quarter, 2024 estimates may soon need to be walked back. The resultant disappointment could place a new round of pressure on shares. With this, consider SNDL one of the cannabis stocks to sell.
Tilray Brands (TLRY)
With Tilray Brands (NASDAQ:TLRY), it’s even more abundantly clear that poor fundamentals make it a sell, no matter how much the regulatory environment for cannabis in the U.S. could get just a few months from now. As Seeking Alpha commentator Stone Fox Capital recently pointed out, there are several red flags with TLRY.
First, this Canada-based cannabis purveyor is lacking when it comes to organic growth. In recent quarters, revenues have only increased due to the impact of Tilray’s acquisition of several craft beer brands from Anheuser-Busch InBev (NYSE:BUD). Second, despite this inconvenient detail, plus the mixed performance of Tilray’s cannabis segment, TLRY stock still trades at a premium valuation compared to peers. Adding to Stone Fox Capital’s point, one can argue that the craft beer acquisition now makes Tilray more of a brewer than it does a cannabis company.
Besides really calling TLRY’s valuation into question, this also suggests that, even if U.S. cannabis legalization arrives sooner rather than later, it will likely be less of a needle-mover for Tilray than for most of the other cannabis companies listed above and below. Considering its less-stellar risk/reward proposition, sell and/or avoid TLRY.
Verano Holdings (VRNOF)
Based in Chicago, Illinois, Verano Holdings (OTCMKTS:VRNOF) is another large MSO. The company, which is America’s fourth-largest MSO, operates in a total of 13 U.S. states. Vertically integrated, with cultivation, wholesale and retailing segments, Verano may (on paper) appear well-positioned to thrive if cannabis becomes fully legal across the United States.
Still, compared to similar names, Verano may be less likely to “crush it” if or when big regulatory changes occur. After all, as seen in recent quarterly results, gross profit growth has stagnated and operating income has declined compared to last year. While not certain, it’s possible VRNOF stock may be at risk of greater share price decline, given it doesn’t have something like high organic growth to fall back on if regulatory changes fail to take shape starting later this year.
Trading at a trailing EV/EBITDA ratio of only 6, investors have clearly accounted for Verano’s weaknesses already. Then again, if VRNOF is selling at a discounted multiple during a time of stronger sentiment for cannabis plays, a sentiment shift could just turn it into a value trap. For these reasons, consider VRNOF one of the cannabis stocks to sell.
On the date of publication, Thomas Niel did not hold (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.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.