In March 2023, many stocks are beginning to get expensive. Tech stocks have been rallying for most of this year. Financial stocks are doing OK. Basically, the markets are getting more expensive. One type of stock has gotten cheaper, however: cannabis stocks. For the year, the AXS Cannabis ETF is down about 6% — in contrast to a 6% gain in the TSX Composite Index. So, cannabis stocks are underperforming.
Depending on who you ask, that might be a good thing for those who aim to invest in cannabis stocks. A price decline does not necessarily make a stock “cheaper” relative to the profit underlying the stock, but it arguably makes such undervaluation more likely.
In this article I will explore the topic of cannabis stocks and attempt to determine whether these beleaguered equities are good buys in March 2023.
Still losing money
One big thing you need to keep in mind with cannabis stocks is that they’re still losing money — lots of it. And by that I don’t mean that their stock prices are going down. I mean the companies underlying the stocks are unprofitable and running out of cash.
Take Canopy Growth (TSX:WEED), for example. In its most recent quarter, it delivered -$2 billion in net income and -$1.8 billion in operating income. Cash from operations was a -$140 million outflow. In other words, Canopy Growth lost money going by most “profit” metrics that investors look at.
Was the situation better the quarter before? Yes, the losses were lesser in the past. In fact, in first quarter of last year, Canopy even managed to pull of $365 million in positive net income! However, value is judged by the present and the future, not the past, so investors today shouldn’t pay much attention to the fact that Canopy had a profitable quarter a year ago. It’s losing money today.
Furthermore, Canopy is running out of cash. In its most recent quarter, the company had $769 million in cash. That’s down from the $5 billion it got by selling shares to Constellation Brands a few years ago. The company’s financial picture is deteriorating, and it’s hard to picture where relief is going to come from.
Another thing that’s happening with cannabis stocks right now is a decline in revenue. Shortly after legalization hit in Canada, cannabis companies like Canopy increased their revenue. However, that trend has started to reverse. In its most recent quarter, WEED did $122 million in revenue — down 22% from the same quarter a year before. So, it’s losing money on declining sales — not a pretty picture.
Final verdict: Cannabis stocks are extremely risky
Taking Canopy Growth as a representative sample of the sector, we can say that cannabis stocks are very risky. Canada’s other big cannabis companies are in much the same situation that Canopy is in: losing money and seeing sales stagnate.
If you wish to invest money, invest it in a thriving sector. You could look into railroads like CN Railway, which are generally very profitable and have delivered great returns for investors, or index funds, which minimize risk by spreading your eggs across many baskets.