CGC: Avoid These 2 Recently Downgraded Cannabis Stocks

Cannabis stocks have generated stellar returns this year, taking full advantage of a growing domestic and international marijuana market and optimism about the potential for large-scale legalization or decriminalization of marijuana at the federal level. But while the Democrat’s control of the White House and both legislative houses of the U.S. government augers well for most pot producers, the rally in their stocks seems to have lost steam.

As legalization talks sweep the nation, competition in the cannabis industry is also heating up. Amid this scenario, Wall Street analysts have downgraded Canada based cannabis stocks Canopy Growth Corporation (CGC) and Sundial Growers Inc. (SNDL) because the companies are struggling to stay afloat financially.

Both have had a difficult time increasing their sales and their losses are too high to promise a return to profitability anytime soon. Furthermore, both the stocks are trading at lofty valuations. Considering these factors, we believe it’s better to avoid them for now.

Canopy Growth Corporation (CGC)

Headquartered in Smiths Falls, Canada, CGC produces, distributes and sells cannabis for recreational and medical purposes in Canada, the United States, Germany, and the United Kingdom. The company operates through two segments – Cannabis, Hemp and Other Consumer Products, and Canopy Rivers.

This month, CGC launched Quatreau, a premium ready-to-drink CBD-infused sparkling water, in the United States. The company believes that the new beverage, which is now the top-selling ready-to-drink CBD beverage in Canada, will resonate with U.S. consumers who are looking for a naturally flavored, zero sugar option.

CGC’S net revenue has increased 23.2% year-over-year to C$152.53 million in the third quarter ended December 31, 2020, driven by improved commercial and operational execution. However, the company’s adjusted gross margin declined 500 basis points from its year-ago value to 26%. Its net loss was C$904.38 million, and its loss per share was C$2.43 over this period. Also, its adjusted EBITDA loss was C$68 million.

The stock is down 19.9% over the past month and is currently trading 40.3% below its 52-week high of $56.5, indicating short-term bearishness. Also, CGC’s forward ev/sales currently stands at 27.88x, 256.1% higher than the industry average 7.83x.

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Of the 12 Wall Street analysts that have rated the stock, three rated it “Sell.” CGC’s POWR Ratings are consistent with this bleak outlook. The stock has an overall D rating, 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.

CGC has a C grade for Momentum, D for Stability, and an F for Value. Of the 239-stocks in the F-rated Medical – Pharmaceuticals industry, it is ranked #216.

In addition to the POWR Ratings grades I’ve just highlighted, you can see the CGC ratings for Growth, Quality, and Sentiment.

Sundial Growers Inc. (SNDL)

Incorporated in 2006, SNDL is involved in the production, distribution, and sale of cannabis products for the adult-use market. It sells its products under the brand names Top Leaf, Sundial Cannabis, Palmetto, and Grasslands.

This month, SNDL and SAF Opportunities LP, entered a joint venture through a new corporation, SunStream Bancorp Inc. The partnership will focus primarily on cannabis-related verticals by seeking both Canadian and international opportunities and investments that will help the companies generate attractive returns for their stakeholders.

SNDL’s net cannabis sales declined 36% sequentially to C$12.9 million in the third quarter, ended September 30, 2020, due primarily to its focus on branded retail sales. The company reported a net loss of C$71.4 million and a loss from operations of C$89.23 million over this period. Its loss per share was C$0.53. Furthermore, SNDL’s adjusted EBITDA from cannabis operations was negative $4.4 million, compared to a loss of $3.9 million for the three months ended June 30, 2020.

The stock is down 31.1% over the past month and is currently trading 61.9% below its 52-week high of $3.96, indicating short-term bearishness. The stock appears to be extremely overvalued currently. In terms of its forward ev/sales, SNDL is currently trading at 51.76x, 561.1% higher than the industry average 7.83x.

Of the four Wall Street analysts that have provided ratings for the stock, two rated it “Sell.” Also, the consensus price target of $0.60 represents a potential downside of 60.3%.

SNDL’s weak prospects are apparent in its POWR Ratings also. The stock has an overall F rating, equating to a Strong Sell in our proprietary rating system. SNDL also has an F grade for Stability and Quality, and a D for Value. In the same industry, the stock is ranked #230.

To see additional POWR Ratings for Growth, Sentiment, and Momentum for SNDL, click here.

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 $34.17 per share on Wednesday afternoon, up $0.44 (+1.30%). Year-to-date, CGC has gained 38.68%, versus a 5.39% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...