The cannabis industry has a lot of potential and saw a splendid stock market bull run in 2020. The past year has seen a significant increase in the consumption of CBD products due to increased stress and anxiety with people being locked in their homes to an almost unprecedented degree. New Frontier Data has predicted that total cannabis sales will hit$30 billion by 2025 in the 11 U.S. jurisdictions where its usage is legal.
Because the industry has long operated in the face of strong opposition, it has shown a tremendous growth. With the Biden administration at the helm now, widespread legalization of adult-use marijuana is highly anticipated. These developments add to the prospects of the industry’s upside.
However, the industry is still in its nascent stages, and there are many hurdles before it. Most pot producers are undertaking growth initiatives, but they lack strong cash positions and profitability to support them. Some producers are also saddled with high debt levels.
But due to the euphoria surrounding marijuana stocks, most of them are currently trading at high prices. But their valuations look stretched because their fundamentals generally do not justify their price levels. Four such overvalued stocks are Canopy Growth Corporation (CGC), Curaleaf Holdings, Inc. (CURLF), Cronos Group Inc. (CRON), and Trulieve Cannabis Corp. (TCNNF).
While optimism over marijuana legalization is understandable, investors must look at other aspects while picking stocks. One must conduct an impartial assessment seeking stocks with relatively cheap valuations and robust growth prospects. As for the overvalued ones, clearly investors must stay away from them at this juncture; we think they are due for a pullback.
Canopy Growth Corporation (CGC)
CGC manufactures, develops and sells recreational and medical cannabis in Canada, the United States, the United Kingdom and Germany. Cannabis, Hemp and Other Consumer Products, and Canopy Rivers are the two segments through which it operates. Dried cannabis flowers, oils, and softgel capsules are the major products sold by CGC under the brands Tweed, Deep Space, Quatreau, and Spectrum Therapeutic.
During the third quarter, ended December 31, 2020, CGC’s net revenue climbed 23.2% year-over-year to C$152.5 million driven by improved commercial and supply chain execution. However, the company’s recreational B2B net sales showed no growth for the quarter because the product mix was inclined towards the value segment. The company’s loss per share expanded to C$2.43 from C$0.26 posted in the same period last year. Despite major cost-saving efforts, CGC is still grappling with high long-term debt. At the end of the quarter, its long-term debt soared to C$619 million compared to C$449 million posted in the same period last year.
Analysts expect CGC’s revenue for the quarter ending March 31, 2021 to be $127.2 million, representing a 58.1% increase year-over-year. Its loss per share for the quarter is likely to narrow 84.5% to $0.18.
CGC also has a stretched valuation now. Its p/s of 33.5x much higher than the industry median 8.62x.
CGC ended Friday’s trading session at $38.63, gaining 68.4% over the past year. During the past six months, CGC climbed 120.4%.
CGC’s POWR Ratings are consistent with this bleak outlook. The stock has an overall rating of D, which translates to Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
It has a grade of F for Value and Sentiment, and a D for Stability and Quality. It is ranked #213 out of 238 stocks in the F-rated Medical – Pharmaceuticals industry.
In total, we rate CGC on eight different levels. Beyond what we stated above, we have also given CGC grades for Growth and Momentum. Get all the CGC ratings here.
Curaleaf Holdings, Inc. (CURLF)
CURLF operates in the integrated medical and wellness cannabis segment in the United States. Cannabis Operations and Non-Cannabis Operations are the two segments through which it operates. Together with these segments. CURLF undertakes the production and sale of cannabis. During the third quarter, ended September 30, 2020, CURLF’s total revenue surged 164% year-over-year to $182.4 million. Its loss per share was $0.01, matching the loss of the prior year period. CURLF closed the acquisition of Grassroots, creating the globe’s largest cannabis company by revenue. Overall, its net loss increased during the quarter due to rise in non-cash expenditure and income tax expenses.
The stock is also overvalued considering its financials. CURLF’s forward EV/EBITDA is 81.10x as compared to the industry average 21.94x.
Over the past year, CURLF has advanced 162.9% to end Friday’ trading session at $16.85. During the past six months, the stock has rallied 91.2%.
CURLF’s dismal prospects are also apparent in its POWR Ratings. The stock has an overall rating of D which equates to Sell in our proprietary rating system. CURLF has a D grade for Growth, Value, and Quality. It is ranked #186 of 238 in the Medical – Pharmaceuticals industry.
Click here to see the additional POWR Ratings for CURLF (Momentum, Stability, and Sentiment).
Cronos Group Inc. (CRON)
CRON is a cannabinoid company that manufactures, markets, and distributes hemp-derived supplements and cosmetic products through hospitality partners, ecommerce, and retail. The company operates in Canada, the United States and other countries.
A global wellness platform, PEACE NATURALS, adult-use brand Spinach and COVE, and hemp-derived Lord Jones and PEACE+ represent the company’s brand portfolio. During the third quarter ended September 30, 2020, CRON soared 143% over the year to $1.6 billion. Its EPS for the quarter fell to $0.19 from $1.62 posted in the same period last year. The company witnessed an expansion in its operating loss due to a rise in its sales and marketing costs incurred for the launch of new U.S. hemp-derived CBD products under the Lord Jones™ and Happy Dance brands.
Analysts expect CRON’s revenue for the quarter ended December 31, 2021 to be $13.78 million, representing a 74% increase year-over-year. Its loss per share for the quarter is likely to narrow 14.3% to $0.06.
CRON’s valuation doesn’t justify its fundamentals. Its trailing-12-month ev/sales is 77.61x, much higher than the industry average 9.44x.
CRON has surged 60.8% during the past year to close Friday’s session at $12.30. Over the past six months, the stock has advanced 115.4%.
CRON’s gloomy prospects are reflected in its POWR Ratings. The stock has an overall rating of F, which equates to Strong Sell in our proprietary rating system. CRON’s has a D grade for Stability, Value and Quality, and an F grade for Growth. In the Agriculture industry, it is ranked #32 of 33 stocks.
In addition to the POWR Ratings grades I’ve just highlighted, you can see CRON’s ratings for Momentum, and Sentiment here.
Trulieve Cannabis Corp. (TCNNF)
TCNNF is a medical cannabis company that is involved in the cultivation and production of products in-house. It distributes its products to Trulieve branded stores (dispensaries) in Florida, Massachusetts, California, and Connecticut. Some of its key products are smokable flowers, concentrates, flower pods for vaporizing, topicals, capsules, tinctures, as well as vape cartridges. It operates through more than 75 dispensaries in the United States.
TCNNF’s revenue for the third quarter ended September 30, 2020 surged 93% year-over-year to a record $136.3 million. The company opened nine stores in the third quarter and achieved its 2020 goal of 68 stores nationwide. TCNNF also expanded its operational footprint into Pennsylvania through acquisitions of PurePenn LLC and Solevo Wellness.
Although the company is on a growth path, its cash flows are still problematic. TCNNF has a history of negative cash flows over the past year. Considering its expansion plans in Massachusetts, California, and Connecticut, TCNNF requires ample cash. It must ensure that it doesn’t burn too much cash in its expansion process and must be disciplined with its working capital.
A consensus revenue estimate for the quarter ended December 31, 2020 is $161.1 million, representing a 102.2% increase year-over-year. Meanwhile, its EPS is likely to decline 29.4% to $0.24.
TCNNF’s valuation doesn’t justify its fundamentals. Its trailing-12-month EV/EBITDA multiple is 28.37x versus the industry average 21.94x.
Over the past year, TCNNF has gained 334.2% to close Friday’ trading session at $47.79. During the past six months, the stock has surged 115.3%.
TCNNF’s gloomy prospects are reflected in its POWR Ratings. The stock has an overall rating of D, which equates to Sell in our proprietary rating system. TCNNF has a grade of D for Stability and Value, and an F for Growth. It is ranked #170 of 238 stocks in the Medical – Pharmaceuticals industry.
Click here to see the additional POWR Ratings for TCNNF (Momentum, Sentiment and Quality).
The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
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CGC shares were trading at $37.65 per share on Monday afternoon, down $0.98 (-2.54%). Year-to-date, CGC has gained 52.80%, versus a 4.09% 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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