1 Volatile TSX Marijuana Stock to Avoid Holding in Your RRSP or TFSA

Speculative, risky stocks like Aurora Cannabis are best held in a taxable account.

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Your Registered Retirement Savings Account (RRSP) and Tax-Free Savings Account (TFSA) should hold a mix of well-diversified stocks and bonds, with solid fundamentals and long-term potential. The goal here is to grow wealth slowly and sustainably, taking measured risks and letting investments compound.

So it blows my mind when I see investors staking their hard-earned RRSP and TFSA contributions on speculative, volatile stocks. These stocks can swing wildly each trading day, either going to the moon or cratering with a massive loss. Their movements are not based on any discernible catalysts and certainly not backed by any fundamentals.

Holding these stocks in an RRSP or TFSA is sub-optimal. Yes, you can reap fat tax-free or tax-deferred gains. You can also end up with a large capital loss that you cannot claim against capital gains for the year. In a taxable account, you can, which makes speculating somewhat less risky.

Aurora Cannabis

Aurora Cannabis (TSX:ACB)(NYSE:ACB) is a Canadian licensed cannabis producer. Currently, it has eight licensed production facilities, five sales licences, and operations in 25 countries. It is also one of the worst-performing TSX stocks of 2022, posting a year-to-date return of -26.8%.

ACB stock is highly volatile, with a beta of 3.08. For reference, the market has a beta of 1.0. A stock more volatile than the market has a beta greater than 1.0. A stock less volatile than the market has a beta less than 1.0. With a beta nearly three times that of the market, ACB is a highly risky play.

Coupled with poor fundamentals in the form of a -254% profit margin, -119% operating margin, -6.7% return on assets, -29.1% return on equity, -11.1% year-over-year quarterly revenue growth, and a diluted earnings-per-share of -3.2, I would avoid holding ACB long term in a TFSA or RRSP.

Put your money elsewhere

Frankly, ACB and the rest of the Canadian marijuana sector have been a disappointment for investors, having failed to achieve the explosive growth and shareholder value predicted in 2018.

The sector’s dominant exchange-traded fund (ETF), Horizons Marijuana Life Sciences Index ETF dropped over 52% in the last 365 days, as its underlying companies continually post poor earnings, fail to achieve profitability, or miss revenue projections.

For a swing trade in a taxable account, the high volatility of ACB might be a benefit. Even if the trade goes wrong and you sell, at least you can book the capital loss against future capital gains.

Not so in a TFSA or RRSP. Selling for a loss there means a permanent destruction of valuable and finite contribution room. For those accounts, I would skip risky stocks like ACB and buy safer assets like an all-in-one asset allocation ETF.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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