Since legalization, cannabis stocks have fallen to ever-lower lows. It seemed that not only had the bubble burst, but there really was nowhere where investors could see a future. That is, until the recent election and inauguration of the new US President Joe Biden.
Cannabis share basically surged across the board after the inauguration of the new democratic leader of the free world. Also, the November 2020 elections saw four more states legalize the recreational use of marijuana. But does that make cannabis a good buy these days?
While there are certainly cannabis stocks to consider, it’s not a sweeping choice as it seemed in 2018. In fact, I would still stay a long way from these three stocks now and in the future. Even if the United States legalizes marijuana nationwide, these stocks are still poised for failure.
Aurora Cannabis
Aurora Cannabis Inc. (TSX: ACB) (NYSE: ACB) was once considered the greatest thought to befall cannabis stocks. The company not only had the largest pot production, but also the cheapest price per gram. But while other cannabis companies formed partnerships, Aurora declined. It diluted the stock before and again, creating a situation from which it simply cannot climb back.
While the company can still boast of low cost, this is something that can be duplicated by others in the future. It also focuses mainly on medical marijuana, which will soon take a backseat as cannabis continues to grow. Shares are now up just 133% in the past five years, nothing compared to other companies in the four figures, and are down 92.5% since legalization. Revenue continues to decline year on year and profit value above sales (EV / sales) remains high at 11.2x (LTM) for the past 12 months. Sorry investors, this stock has risen but it is certainly not cheap.
Cronos Group
Cronos Group Inc. (TSX: CRON) (NASDAQ: CRON) has an advantage over Aurora in that it is located in the United States and has a partnership with Altria. Unfortunately, the company still has a lot of competition. While it has an advantage in the cannabidiol (CBD) market, that market will be nothing if and when cannabis is legalized across the US. And again, this medicinal market will also lag once recreational use begins.
Now if you look at EV / sales, Cronos is incredibly expensive under the cannabis stocks, a whopping 59.2 times in the LTM! Although revenues are increasing year on year due to the increase in recreational use, it is still far behind the level of a few quarters ago. Although the stock has risen 36% in the past year, it is still 57% lower than its March 2019 high. Again, analysts just don’t think this stock has what it takes to take on cannabis competitors.
Briefly
There are certainly some great cannabis stocks to choose from to take advantage of this momentum. But these stocks are not one of them. Any company has way too much to crawl back on, and with other stronger options for long-term investors, it’s best to steer clearly.
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