All that glitters is not gold
After looking at the past year, we can get two different points of view. Marijuana businesses have gained reputation like never before. Canada has legalized recreational marijuana and quite a few U.S. states too. And some foreign countries have legalized cannabis use in one way or another. It seems incredible to think that what it was a market with a bad reputation, is now a legal way to earn money in several key markets.
But, on the other hand, for many cannabis stock investors, 2018 has been a mediocre year. This is because most stocks have ended lowering by a remarkable percentage. The cannabis shortages seem to be extended to 2019 and the competition is tremendous. Therefore, there are no guarantees that cannabis stocks can be better this year.
Sean Williams (TMFUItraLong) wrote recently: “As I look around at the more than four dozen marijuana stocks with a market cap in excess of $200 million, a few stand out as particularly avoidable in 2019. Here are four pot stocks to absolutely not buy.”
Possibly the most polarizing stock among them all, Aurora Cannabis could be one in risk in 2019. Many investors are in love with Aurora cannabis due to its production. But production is not all. Effectively, this company is on track to be the leading producer. Aurora seems to be able to product 700.000 kilograms per year. And this number could be higher if Aurora decides to develop the land owned by ICC Labs and MedReleaf. No doubt this production will help Aurora to secure supply deals and get cheaper prices per gram. However, there are some unanswered questions left for the investors.
“Will Aurora quit walking over its shareholders with bought-deal offerings and dilutive acquisitions?” – asks Sean Williams. “No marijuana company has abused its shareholders more than Aurora, which has ballooned its outstanding share count from 16 million at the end of fiscal 2014 to probably more than 1 billion by the second quarter of fiscal 2019.”- said Mr. Williams.
But the increasing number of shares weighs on the value of the already existing shares, which makes it more difficult for Aurora to create a real per-share profit.
Probably, Aurora Cannabis will not get profits in 2019. It’s received any help from derivatives, marketable security revaluation, and fair-value adjustments to biological assets. But even increasing the sales this year, it may have operating losses.
This dispensary operator is converting the purchase of marijuana into a real experience. This company has broken down boundaries in order to normalize cannabis-buying process. But another question is the investment perspective.
The company is going to buy PharmaCann for 682 million. So far it is going to be the biggest U.S.-based cannabis deal. Once the deal is done, they will have licenses to 66 retail locations in 12 states, and 13 cultivation facilities too.
MedMen is eager to accelerate its expansion. But, is it paying a high price to do it? Before the deal with PharmaCann, MedMen wanted to open about 50 dispensaries by 2020. It has 14 now. To do that, it needed to spend its cash on developing new locations. This means very high administrative costs related with the expansion. And this fact give the company few or none chance of getting operating profits in 2019 and probably in 2020 too.
MedMen’s operating losses could cause the company to turn to the secondary market to obtain capital regularly. The same way this dilution was bad for Aurora’s share price, it easily could have the same effect on MedMen stock.
The Green Organic Dutchman
This grower has had 40% declining share price last year. The company wants to become the fourth or fifth largest grower in the U.S. by peak annual output estimated almost 200.000 kilograms. The company is dedicating around 20% of its production to highly profitable edibles and cannabis-infused beverages. This can bring new investors.
This company has entered in the cannabis market very late. During its fiscal third quarter it had not registered cannabis sales, and probably it will not see its capacity of expansion projects until sometime in 2109. Obviously, the longer takes to complete the projects and grow cannabis for harvest, the fewer chances it has to create profitable long-term deals.
Moreover, although the edibles and beverage products have a high margin benefits, they are going to face a ferocious competition due the brand-name beverage deals already announced. This gives The Green Organic Dutchman few chance of getting operating profits in 2019, which makes it an avoidable stock.
After starting at a list price of $17, shares of this Canadian grower reached $300 just two months later. Investors hoped on the wagon thinking it would be a major-name partner due to its medical cannabis brands were quite famous. Those brand-name partnerships became a reality in last December, with Tilray securing a medical-products distribution deal with Novartis subsidiary Sandoz. And a little bit later, the company announced a 50-50 project with Anheuser-Busch to investigate and produce cannabis-infused beverages.
Moreover, the end of the lock-up period is near. After the 180-day period when insiders couldn’t sell, it is obvious to expect some kind of selling pressure as some insiders lock in profits.
Besides, Tilray is far away in capacity of expansion versus its larger mates. For example, Tilray sports a bigger market cap than Aurora Cannabis, although its almost 850.000 square feet in growing ability, that could easily produce 80.000 kilograms per year, is nothing compared to Aurora’s 700,000 kilograms in peak output, or Canopy Growth’s potential, which can be more than 500.000 kilograms.
And finally, Tilray will not obtain profits in 2019. Like it happens with Aurora, it spends on capacity expansion, national and international, medical research and branding.
Therefore, it seems that Tilray could lose half its value in 2019. Do you think it is a good stock to invest in now?