If you’re reading the tea leaves (or some other types of leaves) on the cannabis market today, you could do worse than take a reading of brand-new analysis from Motley Fool’s Sean Williams.
In an article called “3 marijuana stocks to avoid like the plague in December,” Williams gives us an early Christmas present by deciphering some of the activity on the market and outlining some cautionary tales about over enthusiasm for the five-pointed leaf.
Williams’s philosophy here is that although cannabis stocks had a major run-up prior to Canadian legalization, many are floundering now because they don’t have their delivery pipelines fully arranged at this time.
“What many investors have overlooked is just how long it’s going to take before growers have their capacity up to spec,” Williams writes. “Although nearly 1.9 million kilograms could be produced by the country’s five top growers once they’re at full capacity, these five growers are only producing at a meager annual run rate of about 150,000 kilograms at the moment. This … suggests that a handful of pot stocks could be worth avoiding like the plague this December.”
In particular, Williams casts a skeptical eye on Aurora (ACB), which has basically cut its value in half over a month’s time – granted, this isn’t the lowest Aurora has been since it hit a low mark near five dollars in August, but its current price at seven dollars and change is not attractive.
That’s just the start of it, according to Williams, who contends that “the negativity (over Aurora) is well deserved,” arguing that over-acquisition and disorganization may hurt the firm.
“There are no guarantees that Aurora will stay on track with so many acquisitions in such a short time frame,” he writes.
Williams also cites on-record losses and problems with share counting.
“Aurora’s acquisition-hungry strategy has ballooned its outstanding share count,” Williams adds. “This doesn’t account for the shares it just issued … at the end of the prior-year quarter, Aurora had 371.9 million shares outstanding, and less than five years ago had just 16 million shares. The higher this share count goes, the more difficult it’ll be for the company to generate a meaningful per-share profit.”
In addition, Williams also critiques GW Pharmaceuticals and its innovative epilepsy drug based on cannabis formulations. The argument here looks at precedent with cannabis pharmaceuticals and some of the realities of the pharmaceutical market where demand might not work out in GWPH’s favor.
If you’re thinking you need an alternative to some of these dangerous options, some of the cannabis forerunners may have a significant potential upside. CGC and Tilray are just two that many are watching as they seem to begin to rebound from some chronological lows. It’s also worth looking more in-depth at the prospects for further legalization in the future, and how medical use cases may push markets over the long-term.