Though I am a big fan of stocks, on the whole, there are many individual stocks I wouldn’t touch with a 60-foot pole. Examples include bankruptcy cases, Russian stocks, and cannabis stocks. It’s not that there aren’t good opportunities in these sectors — there are — it’s just that the quality of the companies in them is so low on average that sifting through the dirt to find a diamond isn’t worth it. In this article, I will explore one TSX stock I wouldn’t touch with a 10- or even 60-foot pole.
Canopy Growth
Canopy Growth (TSX:WEED) is a Canadian cannabis company. It sells marijuana, hashish, edibles, and related products. There was a time when this company was one of the hottest things in town. In the lead-up to legalization in 2018, the company’s stock rallied to incredible highs. However, after legalization hit, it came out that the company was still losing money despite the revenue growth that legalization brought with it. Its stock started crashing then and has been in a secular downtrend ever since then.
No growth
There was a time when Canopy Growth was considered a growth stock. It’s in the company’s name, after all. So, it shouldn’t be surprising that the company did some growing in the old days. However, the growth is no longer in the picture. Because it had to wind down some money-losing business units a few years ago, Canopy’s revenue growth decelerated. In its most recent quarter, it delivered the following:
- $121 million in revenue, up 2.1% year over year
- $5.9 million in gross profit, improved from a loss in the year-ago quarter
- A -$91 million operating loss, improved from $1.8 billion
- A $41 million net loss
- -$0.07 in diluted earnings per share (EPS), improved from -$5.24.
As you can see, there was hardly any revenue growth, and all of the earnings figures were negative. On the bright side, the losses narrowed as a percentage of revenue. That doesn’t change the fact that Canopy is rapidly burning through its cash pile, though. In 2018, it got a $5 billion cash infusion from Constellation Brands; as of the last quarter, it was down to $577 million. If it keeps losing money at this rate, then Canopy will eventually run out of balance sheet cash as well. Who knows what that could lead to?
Why Canopy’s earnings are negative
The main reason why Canopy keeps losing money is because it spent untold millions of dollars buying up competitors back in 2018, only for them to prove long-term unprofitable. Despite their lack of profits, these acquired companies nevertheless cost money to run. So, Canopy kept on incurring huge losses just to keep them going. Yet it was selling a commodity (cannabis) that didn’t have very high profit margins. So, it just kept on losing money year after year. This trend continues to this day.
Weed stock: The Foolish takeaway
I suppose it’s possible that Canopy could right its ship someday, but I wouldn’t bet on it. It’s losing money and running out of cash at the same time and is no longer able to attract multi-billion-dollar funding rounds from larger companies. I wouldn’t touch it with a 60-foot pole.
