Some popular marijuana stocks are overvalued.
The marijuana industry is a budding sector that is increasing rapidly as more companies become public in the U.S. and Canada, but some stocks have become overvalued. The billion-dollar industry is booming for a few reasons: hemp companies are gaining popularity, more states allow the adult-use of cannabis and an increasing number of marijuana companies are traded on Canadian exchanges. While investors are drawn to the industry, there are too many players, says Jason Spatafora, co-founder of Marijuanastocks.com and a Miami-based trader. “There’s definitely a seasonality with pot stocks and come March, the liquidity always drops off a cliff into the summer and that’s when you should look to buy,” he says. Here are seven marijuana stocks that are overvalued right now.
Tilray (ticker: TLRY)
Tilray, a Canadian weed manufacturer, is overvalued, Spatafora says. The Canadian weed manufacturer’s meteoric rise was due to its share structure. “Every quarter there was another 60 million shares entering the market and diluting the value of the current shares,” he says. After its initial public offering last July, the price of the shares rose to $300, with interest from enthusiastic investors. “Tilray will never see $100 again,” Spatafora says. It’s a good company, but not worth a billion dollars.” The company reported a first-quarter net loss of $30.3 million on revenue of $23 million.
CannTrust Holdings (CTST)
Unlicensed marijuana was found at a CannTrust greenhouse facility in July by Canadian inspectors. Regulators seized inventory and the CEO, Peter Aceto, was fired. The Canadian cannabis producer then ceased shipments of all of its cannabis products voluntarily. “Since they are listed on the NYSE, I would anticipate an SEC fine,” Spatafora says. “They are at risk of losing their license from Health Canada. I would say this stock is a short.”
MedMen Enterprises (MMNFF)
MedMen Enterprises reported more losses. The California-based marijuana retailer’s fiscal third-quarter net losses rose to $63.1 million, compared to $16.8 million in the same quarter last year. Even though the company received additional financing of $250 million in a credit facility from Gotham Green Partners, it dilutes to shareholders. “Next to Tilray, Medmen is the greatest short out there in the market,” Spatafora says. “They burn too much money each month. There is no way the market is properly valuing the number of dispensaries they have and its revenue.”
Canopy Growth (CGC)
Canopy Growth remains a dominant Canadian cannabis company, but its investor, Constellation Brands (STZ) is unhappy with its performance after sinking $4 billion for about a 36% stake. Constellation Brands CEO William Newlands said the company lost $106 million. Founder Bruce Linton was fired as Canopy’s CEO in July. Brett Hundley, a senior equity analyst at Seaport Global Holdings, said in a recent report that Canopy “may not grow as quickly as once thought,” and gives CGC a “neutral” rating. The stock is up 50% from Constellation’s investment and up over 500% from Nov 2017 when they bought a 10% stake at $7 a share,” Spatafora says. “Until investors get answers, it’s a hold.”
Tilt Holdings (SVVTF)
Tilt Holdings, reported revenue of $5.1 million in the most recent quarter, a goodwill impairment charge of $500 million and a loss of $554.5 million. The U.S.-based cannabis producer began trading on the Canadian Securities Exchange in 2018 after finishing a four-way reverse merger. The companies included a Canadian business that sought to be a licensed cannabis producer, a Massachusetts-based vertically integrated marijuana seller, customer relationship management software and cannabis delivery software. Tilt is a “dumpster fire” and needs to seek additional capital, Spatafora says. “The company has had a tough time getting back to where it was three months ago,” he says. “It might take a year before you see any uptick.”
Cronos Group (CRON)
Cronos Group received a $1.8 billion investment from Altria Group, (MO), the American manufacturer of Marlboro. The Canadian cannabis producer reported first-quarter revenue of $6.5 million Canadian dollars. “The biggest tip that should be the most obvious is the market cap,” says Chris Parry, a Canadian-based consultant in technology, health care and marijuana marketing. “Why buy any company with a $14 billion valuation if your goal is to double the value of your investment. If you need your company to move to a $28 billion value to make a 100% return on your money, you’re on the wrong horse.”
Hexo reported third-quarter revenue at $13 million — this is below Seaport Global’s estimate of $17.8 million and the consensus estimate of $14.8 million. Hexo’s earnings before interest, taxes, depreciation and amortization, EBITDA, was a loss of $1.9 million. The Canadian marijuana producer, is feeling the pressure of its underperformance and the market has not responded favorably to the previously announced acquisition of Newstrike Brands, says Michael Berger, founder of Technical420, a company that researches cannabis stocks. “Prior to this acquisition, we were excited about this company due to the partnership with Molson Coors (TAP), which will have a 57.5% controlling interest in a new joint venture to develop cannabis-infused beverages,” he says. “We believe that the recent developments don’t justify the valuation and want to see how the team is able to advance other aspects of the business.”
Here are seven marijuana stocks to avoid right now.
— Tilray (TLRY)
— CannTrust Holdings (CTST)
— MedMen Enterprises (MMNFF)
— Canopy Growth (CGC)
— Tilt Holdings (SVVTF)
— Cronos Group (CRON)
— Hexo (HEXO)
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