Investors have been betting on the cannabis industry on optimism over the potential for broad legalization of marijuana in the United States since Joe Biden’s Presidential win last year. This is evidenced by the AdvisorShares Pure Cannabis ETF’s (YOLO) 68.6% returns over the past six months versus the SPDR S&P 500 Trust ETF’s (SPY) 20% gains.
However, many analysts don’t expect broad cannabis legalization in the U.S. to happen anytime soon. According to White House Press Secretary Jen Psaki, “The President supports leaving decisions regarding legalization for recreational use up to the states, rescheduling cannabis as a Schedule II drug so researchers can study its positive and negative impacts and, at the federal level, he supports decriminalizing marijuana use and automatically expunging any prior criminal records.”
Given this backdrop, fundamentally weak cannabis stocks that are currently trading at high valuations based solely on optimism over the industry’s growth prospects based on a federal legalization in the near term could retreat. Two such stocks in this space, Tilray, Inc. (TLRY) and Sundial Growers Inc. (SNDL), are also short squeeze targets of Reddit forums’ WallStreetBets. So, investors should avoid these stocks now.
Tilray, Inc. (TLRY)
TLRY researches, cultivates, processes, and distributes medical cannabis worldwide. The company operates through two segments—Cannabis and Hemp. The Cannabis segment sales consist of adult-use, medical and bulk sales of cannabis under regulated licenses and sold to retail, wholesale, pharmacy, government, and direct to patient.
In December, TLRY and Aphria, Inc. (APHA), a leading global cannabis company, agreed to merge to become the world’s largest global cannabis company with$685 million in pro forma revenue. APHA’s shareholders have voted in favor of the merger, while TLRY is scheduled to hold its shareholder vote on April 30. On April 21, in a CNBC interview, TLRY’s CEO discussed the companies’ plans to become the leading giants in the cannabis industry with their impressive research and marketing strategies, after cannabis is the U.S. and Europe.
On March 10, New Zealand’s Ministry of Health and its Medicinal Cannabis Agency granted TLRY the first approval to commercialize its medical cannabis products across the country. This makes TLRY the first licensed producer to legally export medical cannabis from North America to Australia and New Zealand.
TLRY’s operating loss came in at $21.28 million for the fourth quarter, ended December 31, 2020, compared to a $32.77 million loss in the third quarter of 2020. The company’s net loss increased 27.2% sequentially to $2.95 million. Its loss per share was $0.02 for both the third and fourth quarters of 2020. TLRY’s total liabilities and stockholders’ equity increased 5.5% year-over-year to $945.95 million.
Analysts expect the company’s EPS to be negative for its fiscal year 2021. Also, their revenue estimate of $171.25 million for the current quarter represents a 20% year-over-year decline. Analysts expect the stock’s EPS to decline at a rate of 4.2% per annum over the next five years.
TLRY has lost 37.3% over the past month. It ended yesterday’s trading session at $15.89, which is 15.8% below its 52-week high.
Wall Street analysts expect the stock to hit $24.44 in the near term, which represents a potential 53.8% upside. Of nine Wall Street analysts that have rated the stock, eight rated it a Hold and one rate it Sell.
Sundial Growers Inc. (SNDL)
SNDL produces and markets cannabis products for the medical and adult-use market in Canada. It produces and distributes inhalable products, such as flower, pre-rolls, and vapes. Its cannabis products are used as prescription medicines, and to enhance social, spiritual and recreational occasions.
On March 15, SNDL and SAF Opportunities LP, a member of the SAF Group, agreed to form a 50/50 joint venture through a new corporation, SunStream Bancorp Inc. Through this joint venture, the companies will focus on cannabis-related verticals, seeking both Canadian and international opportunities and investments.
In February, SNDL closed a $22 million strategic investment into Indiva Limited, a leading Canadian producer of cannabis edibles SNDL was earlier granted the right to participate in future equity financings to maintain its pro-rata ownership in Indiva.
In January, SNDL launched high-quality cannabis derivative products under the Top Leaf brand in response to rising consumer demand for solventless cannabis extracts. It plans to provide additional offerings in the first quarter of 2021, including Top Leaf’s Oregon Golden Goat bubble hash and Grasslands’ Sativa & Indica hash.
For the fiscal 2020 fourth quarter, ended December 31, 2020, SNDL’s net revenue was $13.85 million, which represents a decline by 6% year-over-year. The company’s net loss increased 127.8% year-over-year to $64.14 million. Its sales, marketing and general and administrative expenses increased 6% sequentially from the third quarter of 2020 to $8.80 million. And its adjusted EBITDA was $5.63 million, representing a decline of 27.8% sequentially.
Analysts expect the stock’s EPS to be negative for its current fiscal year 2021. A consensus revenue estimate of $12.16 million for the current quarter ending June 30, 2021 represents a 20.6% year-over-year decline.
TLRY has lost 43.5% over the past month. It ended yesterday’s trading session at $0.88. Wall Street analysts expect the stock to hit $0.74 in the near term, which indicates a potential 15.9% downside. Of four Wall Street analysts that have rated the stock, one rated it a Hold and three rated it Sell.
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TLRY shares were trading at $16.78 per share on Wednesday afternoon, up $0.89 (+5.60%). Year-to-date, TLRY has gained 103.15%, versus a 11.62% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More...
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