The AdvisorShares Pure US Cannabis ETF (NYSEARCA:MSOS) has had a successful surge of nearly 30% year-to-date. This showcases the renewed demand for cannabis stocks. The ETF’s performance has been fueled by increased popularity of high-beta securities, and many anticipate that marijuana will soon be downgraded to a Schedule II category substance from its current Schedule I status, creating a broader end market opportunity.
However, the stock market is known to be mean-reverting by nature. Therefore, a short-term pullback is likely, especially given the overreaction by investors to interim variables. In addition, a disinflationary economy is set to decelerate nominal earnings and potentially give rise to credit spreads when interest rates pivot.
With this in mind, it’s time to consider shedding overhyped cannabis stocks before it’s too late. Let’s delve into three specific stocks to consider selling.
Curaleaf Holdings (CURLF)
Source: Jetacom Autofocus / Shutterstock.com
Curaleaf Holdings (OTCMKTS:CURLF) stock has shown a significant surge of approximately 25% year-to-date. However, it’s clear that sentiment is about to shift. While remaining above its 50-, 100, and 200-day moving averages, CURLF stock has slipped below its 10-day moving average and concurrently built up short interest of $22 million, more than double the amount in February last year. Additionally, CURLF’s price multiples are sluggish relative to its peers. For example, the stock’s enterprise value to earnings before interest and tax ratio of 74.36x is 335% higher than the sector average, indicating little relative value.
Looking into Curaleaf’s qualitative overview, it released its third-quarter results in November 2023, revealing a revenue miss of $7.05 million and an earnings-per-share miss of 3 cents. After accounting for discontinued operations, the firm’s net revenues declined by about 1% year-over-year. Slowing growth is likely to continue into 2024. Furthermore, the recent acquisition of Can4Med by Curaleaf, a “pharmaceutical wholesaler specializing in cannabinoid medications in Poland,” may add value, but it comes at a time when Curaleaf’s quick ratio of 0.28x shows that its solvency is borderline. Hence, an economic downturn could impact Curaleaf’s balance sheet significantly.
Given these factors, it’s advisable to stay away from purchasing CURLF stock at this time.
Ayr Wellness (AYRWF)
Source: Shutterstock
Ayr Wellness (OTCMKTS:AYRWF) stock has seen a significant increase of more than 1.45x in the past six months, following robust growth and supportive financial market sentiment. However, it’s time to consider cashing out before it’s too late.
The company’s upcoming release of its fourth-quarter and full-year results presents cause for concern after Ayr’s management provided a gloomy outlook in November. The company stated, “Due to the modest sequential revenue decline in the third quarter, coupled with the temporary cultivation setback in Florida that will impact fourth-quarter revenue by approximately $4-6 million, the company no longer anticipates growth for the second half of 2023 over first half levels.”
In addition to potential earnings disappointment, Ayr Wellness’ capital structure poses an issue. The firm recently extended the maturity of its 12.5% senior notes and LivFree Wellness Promissory notes by two years, thereby onboarding another $40 million in debt. The interest rate on these notes is high, and it’s unclear how a company with an earnings before interest and tax margin of -10.53% can service such demands. Consequently, issues between Ayr’s Wellness’ debt and equity holders could arise.
It’s worth noting that AYRWF is well-placed from a valuation point of view. However, it is advisable to wait until the company resolves its structural issues, especially with an economic decline looming.
Canopy Growth (CGC)
Canopy Growth Corporation Faces Uphill Battle Amidst Sustained Losses and Structural Concerns
Canopy Growth Corporation (NASDAQ:CGC) has been on a downward trajectory, shedding over 80% of its market value in the last year due to a myriad of structural challenges, including extensive capital raises and financial losses.
Debt-to-Equity Ratio Signals Capital Structure Concerns
The company’s decision to file for the sale of an additional 16.32 million common shares, following a $50 million private placement late last year, adds to the skepticism. With a debt-to-equity ratio of 127.28x and a negative cash flow from operations amounting to -$301.61 million, it is evident that Canopy Growth is grappling with capital structure concerns and a scarcity of residual returns for its shareholders. Additionally, the -1.19x return on equity ratio highlights the lack of impact on shareholder value. Although the company managed to narrow its operating losses from $113 million to $60 million year-over-year, it faces an uphill battle with a sluggish -10.55% three-year compound annual growth rate in a disinflationary environment. These factors paint a bleak outlook for the potential ROI for Canopy Growth’s shareholders.
Potential Cyclical Discount and Oversold Status
Despite its challenges, CGC stock presents itself as a cyclical discount, with a price-to-sales ratio of 0.92x. Additionally, the stock’s relative strength index of 39.72 suggests that it is on the verge of being oversold. However, the excitement around these metrics is dampened by the shadow of potential share dilution and sustained financial losses. The mentioned data might not hold sway in the face of the company’s struggles to attain profitability and shareholder value.
On the publication date, Steve Booyens did not hold any positions in the securities mentioned in this article. The opinions expressed in this article reflect the writer’s perspective, adhering to the InvestorPlace.com Publishing Guidelines.
