The cannabis industry has a lot of room for growth, not least because of positive position on it expected of the Biden Administration. However, investors need to be careful while investing in this sector at this stage. Arizona, South Dakota, New Jersey, and Montana have decriminalized adult-use cannabis. But legalization of recreational cannabis in the United States still has a long way to go.

The sector is still at a nascent stage and largely speculative. There are many pot companies which, despite reporting a sales growth, have not hit break-even. Their businesses continue to grapple with issues including high operating costs, logistic bottlenecks, and tight regulatory restrictions.

The industry is also bracing for  broader consolidation. Many overseas companies planning to find a foothold in the U.S. market are collaborating with players that have a strong hold in the country. This all adds to uncertainty around the potential performance of pot companies in the near-term.

Against this backdrop, we believe it is wise to stay away from stocks such as Aurora Cannabis Inc. (ACB) and Tilray, Inc. (TLRY). These companies still must strengthen their fundamentals and find firmer ground.

Aurora Cannabis Inc. (ACB)

ACB primarily deals with the production and distribution of medical cannabis, which includes different strains of dried cannabis, cannabis oil and capsules, and  topical kits. Daily Special, ROAR Sports, CanniMed, AltaVie, MedReleaf, Whistler, Woodstock constitute ACB’s brand portfolio. In addition,  the company sells vaporizers, consumable vaporizers, valves, screens, and herb mills for consuming its CanniMed products.

During its first fiscal quarter ended September 30, 2020, ACB’s revenue fell 8% to $52.7 million. The company is committed to some serious cost-cutting. In its December 16 operational note, the company indicated that it is shifting to a more variable cost structure and scaling back some of its products. ACB intends to align its production to current demand for its premium flower. This can be interpreted as an acknowledgement by ACB that it needs to strengthen its financials to fuel its growth initiatives. The resurgence of COVID-19 and with it an unpredictable demand environment is also hindering the company’s growth.

On a year-to-date basis, ACB has plunged 66.5% to end yesterday’s trading session at $8.40. Over the past six months, the stock has declined 30.3%. Analysts expect revenue for the second quarter ended December 31, 2020 to be $54.9 million, representing a 29.3% year-over-year increase.

ACB’s POWR Ratings are consistent with this bleak outlook. ACB is rated “Sell” with an “F” for Trade Grade, Buy & Hold Grade and a “D” for Peer Grade. It is currently ranked #99 of 240 stocks in the Medical – Pharmaceuticals Industry.

Tilray, Inc. (TLRY)

TLRY is one of the world’s leading cultivators and sellers of medical cannabis. In addition to Canada and the U.S., the company has operations in the U.K. Argentina, Australia, Germany, Israel, Switzerland, and Chile. TLRY also offers its products for research to physicians, pharmacies, governments, and hospitals in the clinical and commercial sectors.

During the third quarter ended September 30, 2020, TLRY’s revenue rose just 0.6% to $51.4 million compared to the prior year period. Its cannabis segment revenue fell  11% year-over-year to $31.4 million due to the  suspension of bulk sales and a mild reduction  in Medical sales in Canada. TLRY’s total cannabis kilogram equivalents sold plunged 53% from the same period last year to 5,107 kgs. However, the net loss per share narrowed to $0.02 from $0.37 in the prior year period.

TLRY has been demonstrating a rather slow growth rate and needs to justify its valuation. Despite many efforts, the company is still dealing with high operating costs and its plans to hit  a break-even have not yet materialized. Moreover, there is much uncertainty over the company’s future post its merger with Aphria Inc. (APHA) in 2021. Many analysts also fear that the merger will lead to further share dilution. TLRY has declined 51.1% year-to-date to end yesterday’s trading session at $8.21. Over the past six months, the stock has risen 5.3%. The consensus revenue estimate for quarter ending December 31, 2020  is$55.6 million, indicating a 18.3% year-over-year growth.

TLRY’s dismal prospects are also apparent in its POWR Ratings. It has an overall rating of “Sell” with a “C” for Trade Grade and Peer Grade and an “F” for Buy & Hold Grade. It is currently ranked #100 of 240 stocks in the Medical – Pharmaceuticals Industry.

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ACB shares were trading at $8.66 per share on Wednesday afternoon, up $0.26 (+3.10%). Year-to-date, ACB has declined -66.59%, versus a 17.79% rise in the benchmark S&P 500 index during the same period.

About the Author: Namrata Sen Chanda

Namrata is an accomplished financial journalist, with nearly a decade of experience. She specializes in interpreting news releases and framing investment strategies, and has worked with some of the leading companies in real estate, banking, insurance, mutual funds, financial research, fintech, and investment education. More...

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