3 Marijuana Stocks Absolutely Not Buy Now – The Motley Fool

Peak fever is back, again. After a lull of about six months, investors do not seem to have enough marijuana stocks, as evidenced by the North American marijuana index that has more than tripled over the past year.

The reason for this trend is clearly related to the imminent legalization of recreational marijuana in Canada, which is expected to take place on October 17, 2018. Adults able to buy cannabis for recreational purposes are expected to generate billions of dollars in cannabis. 39, Canadian Cannabis Industry. once it's running at full capacity. And as you can imagine from the four-digit percentage, the increase of many popular titles since the beginning of 2016 should result in significant long-term profits.

But as we often witness with the "next big thing" on Wall Street, the emotions and expectations of investors tend to surpass themselves. This could very well be the case with a handful of marijuana stocks. Here are three pot stocks that I would like strongly suggest that investors in marijuana stocks keep their distance, for the moment.

Tilray

the Tilray (NASDAQ: TLRY) The roller coaster has been well documented and I think it will not end well.

After evaluating its initial public offering at $ 17 per share on July 18, Tilray's shares reached $ 300 during Wednesday's trading session. This represents a return of more than 1,600% of its bid price in two months. Not too shabby, and almost like cryptocurrency.

However, there are tangible factors that make Tilray a company that investors can appreciate and appreciate. As one of the first producers to receive a culture license from Health Canada, Tilray has a certain history and brand power that many of its competitors lack. It is also a pioneer, becoming the first stock authorized to export both dried cannabis and cannabis oil in Germany, and importing medical weeds to the US to conduct a clinical study. about tremor essential at the University of California. Diego.

But all does not make sense with Tilray, as its valuation, which peaked at more than 26 billion dollars. Even at full capacity, which includes almost 3.6 million square feet of growing space, Tilray is unlikely to generate more than 300,000 kilograms of pot per year. Meanwhile, Canopy growth (NYSE: CGC)At less than half of Tilray's peak value, it can produce more weeds per year (about 500,000 kilograms) at full capacity, and has as much, if not more, branding power.

It also seems very clear, at least for me, that a large part of its recent recovery is due to the high frequency trading (HFT) programs. HFT programs run by institutional investors are designed to operate within well-defined parameters and provide liquidity to the market. But in cases like Tilray, where trading algorithms are deteriorating due to volatility, these HFT programs could simply choose to close, leaving Tilray with significantly reduced liquidity, and exposing it to a potential crash.

Basically and historically, Tilray is a marijuana stock you will want to avoid.

Cronos Group

Another popular pot stock on the dreaded "to be avoided" list is based in Ontario. Cronos Group (NASDAQ: CRON).

Cronos has seen its price more than double since mid-August, mainly due to speculation that it will soon find a partner for beverages, tobacco or pharmaceuticals. After all, Molson Coors Brewing Co. formed a joint venture with HEXO Corp. early August and Constellation Brands announced a $ 3.8 billion investment in Canopy's growth in mid-August. A partnership with Cronos would mean an agreement with perhaps the fifth or sixth largest producer in Canada, depending on the potential for maximum yield.

But there is a lot to dislike about Cronos. In particular, the company is late in the game of expansion capabilities. In mid-July, the company announced that it had formed a joint venture (known as Cronos GrowCo) with a group of investors to build a 850,000-square-foot facility capable of producing 70,000 kilograms. That's fine, but it will take time to build this facility and continue to build its wholly-owned assets. In other words, the Cronos group will probably take longer to reach its full growth potential than its peers, which could translate into lucrative long-term offers.

Basically, Cronos is also a bit of a train accident. Given that spending on capacity expansion and branding will be so large during the cycle, spending may be higher than many of its peers. While earnings may disappoint the sector due to dilution and the continued presence of the black market, Cronos may simply have trouble earning a profit.

Unless the Cronos group is hijacking a whale from a partner, this is not a broth that I suggest you get closer to.

Aurora Cannabis

Aurora Cannabis (NASDAQOTH: ACBFF) is probably the most popular marijuana stock among retail investors, but it's the third and last stock of cannabis that I strongly suggest you avoid.

What investors tend to like about Aurora is the company's insane approach to expanding capabilities. He has spent a fortune to become the expected leader in annual performance, once at full capacity. He organically built Aurora Sky and built the facilities of Aurora Sun; s is associated with Alfred Pedersen & Son in Denmark for the Aurora Nordic project; and acquired CanniMed Therapeutics, MedReleaf, and is buying ICC Laboratories. Add all this, and the company could supply nearly 700,000 kilograms a year, assuming that the CCI assets are fully constituted. With this type of production and scale, Aurora cannabis should be a target for manufacturers of branded drinks and / or tobacco.

This problem, however, is that Aurora's expansion strategy has been done to the detriment of its shareholders. Many of its transactions are financed by common share issues, with capital raising also through the sale of shares, convertible debentures, stock options and / or warrants. . Once the ICC Labs deal concludes, the number of its shares will rise from $ 16 million to $ 1 billion in less than five years. And a higher number of shares means that it will be even harder for the company to generate a meaningful earnings per share.

There is also little guarantee that Aurora will be able to effectively merge all of these acquisitions. A few years ago, we found that 3D printing companies had gone crazy in terms of acquisition in an attempt to gain market share, before attempting to rationalize these redemptions. I'm afraid something similar could happen to Aurora Cannabis, which is valued at a three-digit price-earnings ratio.

The marijuana industry could see Wall Street see the green, but I suspect that these pot stocks will have investors to see in the not too distant future.