When you invest in the stock market, you expect a profitable experience, perhaps occasionally interrupted by a few bear markets along the way. Indeed, that’s what the markets as a whole tend to deliver. Over the long run, they usually deliver high, positive returns.
With certain individual stocks, it’s a different story. There are some stocks out there that deliver persistently negative real returns. In some cases, individual stocks decline in price over periods of decades, or more!
Cannabis is an example of a sector that has given investors a persistently negative experience over the years. After peaking just prior to legalization in 2018, cannabis stocks entered a protracted bear market. The bear market continues today. Many individual cannabis stocks are down 99% from their 2018 highs. Amazingly, there are some signs indicating that the damage may not be completely done yet. In this article, I explore two cannabis stocks that could turn a $100,000 nest egg into zero.
Canopy Growth Corp
Canopy Growth (TSX:WEED) is one of the worst-performing Canadian stocks over the last seven years. Having peaked at a split-adjusted price of $650 in 2018, it went on a long-term decline, falling all the way to $1.65. That’s a decline of 99.75%! Incredibly, the worst may not be behind us.
The problem with Canopy Growth Corp is that it continues losing cash. In its most recent 12-month period, the company had -$71 million in free cash flow, with about $300 million in cash and equivalents on its balance sheet. If the company keeps bleeding cash at that pace, then it will burn through its entire cash pile in just over four years. The company could possibly survive by getting a big loan or equity investment from a larger company. However, that would just be kicking the can down the road. It seems the possibility of Canopy going bankrupt is a real one.
Aurora Cannabis
Aurora Cannabis (TSX:ACB) is another cannabis company that, like Canopy, is struggling under the weight of commodification and poor investments. Like Canopy, Aurora consistently loses money, with $-41 million in net income in the trailing 12-month (TTM) period. The company also has negative free cash flow (FCF) in most years, although its FCF was surprisingly positive in the TTM period.
The core problem with companies like Aurora is that cannabis is a commodity. Buyers largely take cannabis strains of comparable strength as equivalent to one another. As a result, companies have a hard time differentiating their cannabis products, and are in a “race to the bottom” on prices. This makes it very unlikely that such companies will be profitable over the long run.
The bottom line
The bottom line on Canopy and Aurora is that they are two money-losing companies, down big in the markets, that could go down even further from here. After falling by more than 90% in the markets, the two continue to lose vast sums of money and burn through their cash savings. Investors should not see these stocks as compelling “dip buys,” but rather as risky propositions.
