The Motley Fool

2 Marijuana Stocks I’d Avoid at All Costs

Image source: Getty Images

The cannabis industry is one big melodrama so far. Each industry player has an investment pitch, although every plot seems to be sensationalized, if not over exaggerated. Cronos Group (TSX:CRON)(NASDAQ:CRON) and Aphria (TSX:APHA)(NYSE:APHA) are both trying to find their places in the space.

These two cannabis producers desire to outperform the bigger ringleaders and picture themselves as frontrunners, if not leaders, too. But the inconsistent performance of Cronos and Aphria contradict their respective claims to fame. But which one has better chances?

Cronos’s tale

Cronos has been on the receiving end of adverse publicity lately. In early March, the stock soared to $23 that lifted the spirits of shareholders. Thereafter, the movement was listless. The price drops then recover and another round of up and down cycle follow. This week, CRON jumped 7.04%, but a fall is once again imminent.

One thing noticeable about Cronos is its resiliency. Despite the negative or underperforming ratings by some investment analysts, the stock manages to rise and encounter the bad press. However, the next drop might snap that resiliency and leave CRON with no room to recover.

Cronos bring uneasiness, not excitement to stock owners. Sadly, the company didn’t make a good account during the last quarterly reports. The earnings report presented was the worst among all known marijuana companies. Market observers point to the weakness in the business model.

Many expected Cronos to report huge sales from recreational marijuana. Instead, the company’s reliance on medicinal marijuana as a revenue source sticks like a sore thumb. The diminishing gross margin is also hurting Cronos now that it has dropped further by eight points to 45%. If it won’t rise any time soon, Cronos is in a bind.

Aphria’s drama

Aphria’s case is no different from Cronos. The stock is also reeling from a wave of discontent following a disappointing quarterly earnings report. Just like CRON, APHA soared in early March. The stock touched $10.42 before blowing hot and cold. Its price ended last week at a low of $7.65 and advanced 2.74% on Monday.

Being the third-largest cannabis company in Canada, Aphria was seen by many to disrupt the markets and make big waves. Rather, things went south. The company suffered on the operations side. The decision to temper sales to ignite future growth caused recreational marijuana sales to drop to only $7.2 million.

The 2% drop in medical marijuana sales compounded Aphria’s woes. Investors are looking for results and are no longer interested in drama.

Profit margin is the key

Apart from the distressing margins and the need to enhance production capacities to keep up with the industry giants, Cronos and Aphria will have to deal with falling marijuana prices in the near future.

When cannabis companies start hitting their annual peak capacities, only those implementing lost-cost production techniques or methods will see a rise in profit margins. Cronos and Aphria can’t absorb the losses forever.

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

Fool contributor Christopher Liew has no position in any of the stocks mentioned.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.