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Don’t Get Caught Holding the Bag With Weed Stocks

Photo: Plantlady223. Licence: https://creativecommons.org/licenses/by-sa/4.0/ Source: https://commons.wikimedia.org/wiki/File:Young_cannabis_plant_in_the_vegetative_stage_01.jpg

“Never buy a stock that doesn’t pay a dividend.”

These wise words convey a strategy I was taught several years ago that, to this day, I believe to be true and widely accepted. So, why do so many investors pour into weed stocks that don’t pay a dividend? Is it the promise of finding the next 10-bagger, or perhaps the rock-bottom prices?

Here, I give you the goods on one of the most popular weed stocks, Canopy Growth Corp (TSX:WEED), and why I’m highly skeptical on this company’s upside potential.

If you look at the price action of this stock, investors will instantly notice a bearish trend; the stock The stock has fallen approximately 47.5% in a four-month span.

So, what caused the biggest weed stock to fall so much so fast? When we look at Canopy’s financials, we see that the last reported earnings (Q3) show revenue of $9.8 million—a 180% gain over the previous year, but well below analysts’ expectations. Problems arise with revenue growth being severely limited by a lack of products for sale, despite harvesting record amounts of cannabis in the third quarter (5,264 kilograms), less than 10% of that was available to consumers.

And what about dividends? Don’t expect those anytime soon because of an EPS of -0.03, a forecasted EPS of -0.04 for Q4, along with a projected fiscal year-end EPS of -0.09.This only adds to the downsides of Canopy.

Additionally, Prime Minister Justin Trudeau announced recreational marijuana sales were not impending. The federal government, which introduced a bill to legalize marijuana on April 13, 2017, left out a crucial part related to Canopy’s business model: edibles.

In the California, an estimated 10% of the state’s overall marijuana sales are cannabis-infused products, also known as edibles. Does this mean that if, and I mean if, marijuana is legalized in Canada, Canopy will be unable to sell edible products to its recreational consumers? There are many more roadblocks ahead for this company and the industry as a whole.

According to the most recent Health Canada statistics from 2016, almost 130,000 Canadians are eligible to buy medicinal marijuana. Although this number is up substantially from 98,000 recorded users in September 2016, one must objectively ask themselves, “How many of these people are merely recreational users who obtained a medical licence?” Why does this matter?

It matters because much of the “marijuana will go to the moon” crowd are hanging their hats on the assumption that there will be many more recreational users on top of the current medicinal licence holders. They speculate that millions of Canadians will flock to their local dispensaries to purchase large amounts of inventory, but have they factored in that many of the recreational users have already found a way to get marijuana legally?

The problem with Canopy stock, or any weed stock, for that matter, is when investors seek to buy these securities, they not only must have a handle on the underlying fundamentals, but they must also closely follow the political climate, nationally and internationally, making it very research intensive.

Fools would be wise to let Canopy prove themselves over a longer time frame, preferably post-federal legalization. Until that time, you are merely speculating on a medicinal marijuana company that is restricted by the current criminal code and laws.

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Fool contributor Mike Frost has no position in any stocks mentioned.

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