Last year, investors were left waiting for marijuana stocks to make their big comeback.
This year, though, it looks like a rally is starting to materialize. That makes now a great time to consider cannabis stocks if you’re comfortable taking on a little volatility.
But while the sector as a whole seems to be on the upswing, that doesn’t mean all pot stocks are created equally. In fact, some of Wall Street’s favorites in the cannabis space could turn out to be duds.
Sure, there are a few catalysts in play for a number of marijuana stocks. However, this may not be the year for a few companies.
With that in mind, let’s take a look at three of the names in the industry to avoid at all costs.
Marijuana Stocks to Avoid: Hexo (HEXO)
Of all the stocks on this list, Hexo (NYSE:HEXO) is probably the healthiest. The firm has had a strong showing during Canada’s Cannabis 2.0 — an important milestone for marijuana firms like Hexo that want to sell edibles and infused beverages. That said, Hexo filed 38 new patents when edibles became legal in Canada. Plus, the company has been working to cut costs in order to boost profitability. That could help Hexo when it comes to price leverage, as competition in the space heats up.
However, there are simply too many risks when it comes to Hexo’s future. For one, Jefferies’ Owen Bennett recently downgraded the stock to “underperform” from “hold” saying that Cannabis 2.0 may not be the windfall investors were hoping for. Furthermore, Bennett also said the company’s Cannabis 2.0 products “may be nonexistent early on.”
Additionally, Bank of America’s Christopher Carey was also pessimistic on Hexo stock — saying that the firm’s goal to turn a profit by the end of the year is probably unattainable. Nonetheless, he agreed that while Hexo’s management is making smart moves, 2020 simply doesn’t look quite as rosy as investors are expecting.
So overall, Hexo is the first of the marijuana stocks you should stay away from.
Aurora Cannabis (ACB)
If Hexo falls toward the healthier end of the spectrum, Aurora Cannabis (NYSE:ACB) is on the opposite side.
Collectively, marijuana stocks are inherently risky because of the legal challenges facing the entire industry. As Daniele Piomelli, a professor of anatomy and neurobiology at the University of California, Irvine told InvestorPlace in an email, there are still quite a few questions weighing on legislators:
“A strong need is emerging for evidence-based answers to basic questions about the health risks and benefits of the plant. Can we define a low-risk recreational cannabis use for adults the way we define low-risk alcohol drinking? How can we detect cannabis-related driving impairment in an unbiased way? What groups of the population are more vulnerable to the use of cannabis? In what medical indications are cannabis-derived products most likely to be useful? These and other important questions remain largely unanswered and are at the center of today’s societal conversation about cannabis.”
Those unanswered questions have the potential to disrupt the marijuana industry in the years to come. Therefore, you want to pick a strong horse to hitch your wagon to.
That said, Aurora stock simply isn’t that horse. The firm is lacking a financial partner to see it through the tough times. On top of that, the firm is burning through cash and struggling against a massive debt pile. Plus, Aurora has just seen some big changes in its executive suite — which adds an extra layer of uncertainty to the stock.
Canopy Growth (CGC)
It might seem odd to see Canopy Growth (NYSE:CGC) on this list considering the stock just rose a whopping 13% on the back of its better-than-expected third-quarter results. However, that huge move skyward is one of the reasons I think investors should offload Canopy stock.
I’ll concede that the firm’s Q3 results were promising, but investors are far too optimistic about a company with that many headwinds. Have we forgotten that Canopy is still worlds away from becoming profitable? Sure, that’s not the end of the world — especially in the marijuana space. But to take a chance on Canopy, you have to believe they’re going to get there eventually.
However, the more pressing issue for me is the fact that the company is struggling to execute where it matters. After flubbing Canada’s initial marijuana legalization, Canopy once again missed the boat this year during Cannabis 2.0.
It was surprising and concerning to hear that Canopy wasn’t able to scale its cannabis-infused beverages in time to capitalize on Cannabis 2.0 because of its partnership with Constellation Brands (NYSE:STZ) — a beverage company.
So, any way you slice it, that kind of issue happening twice is a red flag from an investment standpoint. I certainly wouldn’t buy Canopy with its lofty new share price, and I’d probably be thinking about taking profits if I’d been holding the stock following earnings.
As of this writing Laura Hoy doesn’t hold a position in any of the aforementioned securities.