Are Cannabis Stocks a Good Buy in April 2023?

Here’s why cannabis stocks such as Aurora Cannabis and Canopy Growth remain high-risk bets for TSX investors.

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Just before Canada legalized marijuana for recreational use in October 2018, shares of cannabis stocks gained significant momentum. For instance, shares of TSX cannabis stocks Aurora Cannabis (TSX:ACB) and Canopy Growth (TSX:WEED) gained 41,000% and 125,000%, respectively, in the five years prior to legalization.

So, an investment of $1,000 in ACB stock and WEED stock would in October 2013 be worth $415,000 and $1.25 million, respectively, in October 2018.

However, in the last five years, both these Canadian cannabis stocks have burnt massive investor wealth and are trading 96% below all-time highs.

What has impacted TSX cannabis stocks in recent years?

Soon after marijuana was legalized, licensed producers went on an acquisition and expansion spree. However, a majority of these acquisitions were overvalued, resulting in multi-billion-dollar write-downs.

Even though the recreational consumption of weed was legalized, the sector is heavily regulated, resulting in a slow rollout of retail stores in major Canadian provinces. This has also led to a heavy imbalance of demand and supply for most cannabis producers.

Due to lower product prices, marijuana companies faced cannibalization from illegal sales that still accounted for more than 40% of total sales in 2019. Moreover, multiple players were attracted to the rapidly expanding addressable market, resulting in lower profit margins for companies.

So, despite rapid growth in sales, Canadian pot stocks reported massive losses in recent years. To improve profit margins, Aurora Cannabis, Canopy Growth, and other companies cut their workforce, reduced manufacturing capacity, and exited several verticals. Further, to support high cash burn rates, they had to continuously raise equity capital, which diluted shareholder wealth at an accelerated pace.

The balance sheets of Aurora Cannabis and Canopy Growth remain vulnerable, given the macro environment is tricky, to say the least. They will find it difficult to raise capital in an economy wrestling with rising interest rates, inflation, and the threat of another financial crisis.

Aurora Cannabis’ losses in the last four years have totalled $1.2 billion, while this figure for Canopy Growth is close to $3 billion. With a pathway to consistent profits still elusive, betting on TSX cannabis stocks is a high-risk proposition even though valuations have fallen off a cliff.

Invest in marijuana stocks in the U.S. market

While Canadian pot stocks are grappling with industry-wide issues, several marijuana producers are thriving south of the border. Green Thumb Industries (CNSX:GTII) is one such stock. Down 80% from all-time highs, GTII stock is valued at a market cap of $2.3 billion.

Unlike its Canadian counterparts, Green Thumb has reported adjusted profits in the last two consecutive years. A multi-state operator, Green Thumb is a vertically integrated marijuana producer that operates 77 retail locations. With a presence in 15 states, the company has a wide range of products that include pre-rolls, edibles, and oils.

Green Thumb reported revenue of $1 billion in 2022, an increase of 14% year over year. It ended the year with earnings of $12 million and operating cash flow of $159 million.

Valued at 2.2 times forward sales, GTII stock is priced at a discount of 200% to consensus price target estimates.

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 Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool recommends Green Thumb Industries. The Motley Fool has a disclosure policy.

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