Recently, the cannabis market received the best hoped-for news. The Drug Enforcement Administration (DEA) announced it is moving forward with plans to reschedule marijuana from a Schedule I to a Schedule III controlled substance. While this excited many investors, the cannabis market is still a ways away from full federal legalization.
While the DEA’s announcement has led to a surge in cannabis stocks, companies facing pre-existing challenges are unlikely to see immediate improvements. In particular, these three cannabis stocks, which were struggling even before the announcement, are not well-positioned to meet the new expectations set by inflated prices.
First, we’ll detail why these stocks have struggled to find a solid footing in the cannabis industry. And, then we’ll delve into how the recent price jumps make for an excellent opportunity to sell while you can.
Sndl (SNDL)
Canadian-based Sndl (NASDAQ:SNDL) had its sights set high in 2018 following the initial boom in cannabis. The company sought to be a top wholesaler and a big name in marijuana. However, wholesaling produces a much less significant profit than retail. So, when demand did not fulfill supply, Sndl suffered.
Now, Sndl has transitioned its focus into three distinct segments of dispensaries, retail and liquor. Retail cannabis sales produce a better margin. Also, operating dispensaries has allowed the company to establish itself at the top of dispensary owners in Canada. Sndl had to diversify its efforts by acquiring Alcanna and stepping into liquor retail.
Despite this turnaround, Sndl has yet to reach consistent profitability. In its most recent earnings, the company showed encouraging results by cutting costs and increasing revenue. Yet, it still suffered an operating loss of $4.4 million in the first quarter. This is a significant improvement from last year, but the company has yet to prove its sustainability.
Since the DEA’s announcement, Sndl’s stock has shot up, but the increase could be short-lived. If you buy Sndl now, you may be subject to the company’s repeated habit of diluting shares to keep itself afloat. The high price and growth could be encouraging in many other cases. However, for Sndl, it may present an excellent opportunity to get out while you still can.
Canopy Growth (CGC)
Canopy Growth (NASDAQ:CGC) is another major cannabis company based in Canada that sought to be one of the largest producers in the country. However, Canopy Growth has struggled to cut operating costs and has lost millions over the last few years. The final quarter of 2023 showed a net loss of 216,797 thousand Canadian dollars.
Although Canopy Growth is one of the stocks that benefited the most from the DEA’s recent price announcement, the company does not have the foundation to support such growth. The stock saw a massive jump in early May but has since settled and begun falling back to earth.
While the rescheduling of marijuana is a step towards legalization on a federal level, there is still a long way to go. Dispensaries would have to spend to undergo a new registration process with the DEA and follow likely strict regulations. A company like Canopy Growth, burning cash at an alarming rate without enough demand, may not be able to sustain itself in reaching that stage.
The auditors have begun including a warning statement on Canopy Growth’s financial reports, indicating uncertainty in the company’s capital. Investors should consider selling this stock while it is inflated before it drops even further this year.
Aurora Cannabis (ACB)
At its peak, Aurora Cannabis (NASDAQ:ACB) was set to be one of the largest cannabis producers in the market. However, the cannabis market in Canada failed to produce the demand that Aurora Cannabis was anticipating. So this left the company in a tricky spot.
Recreational sales gravitated primarily toward the best cost-percentage value and lower-margin products. As a result, Aurora Cannabis shifted its focus primarily to medical cannabis, which includes an even smaller target market. While margins are better in this sector, ACB’s growth is limited in comparison.
Aurora Cannabis has seen some slight improvements since its strategy shift. But, it continues to lose money. The company reported a net loss of $25,563 thousand Canadian dollars in the last quarter of 2023. Like Sndl, Aurora has a history of diluting shares to cover this loss, even starting a one-for-ten (1-10) reverse split earlier this year.
Moreover, Aurora Cannabis continues its plan to invest heavily in new acquisitions and growth opportunities. However, it has had a low success rate in the past. Investors should be wary of continuing to hold shares of Aurora Cannabis as their value might sink further.
On the date of publication, Joel Lim did not have (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.