The cannabis industry changed dramatically in 2018, leading to an explosion of new companies, acquisitions, public listings, and scandals. While the fundamentals of many of these companies remain solid, that doesn’t necessarily mean that every major player in the industry will be successful in 2019, let alone in the next five years.
This is something that investors and traders alike have already learned. Despite the optimism and hype surrounding Canada’s legalization, the last quarter of 2018 saw marijuana companies surrendering most if not all of their gains made over the first nine months.
Coupled with many scandals and regulatory interventions affecting companies, it goes without saying that there are plenty of mines to stay clear of in the cannabis sector. Below are a few pot stocks that you should absolutely avoid!
Aphria
Aphria (TSE: APHA)(NYSE: APHA) has become somewhat of a black sheep in the cannabis industry. Once the fourth largest cannabis company in Canada, accusations regarding insider dealing and shareholder fund funneling through crooked LATAM acquisitions saw the stock stumble.
However, while initial reports regarded the company as worthless, many countered by suggesting that the businesses Canadian assets were still worth something – especially since they are one of the lowest cost producers in the sector.
While many more fundamental-oriented investors might think that reshuffling the management teams is good enough to justify purchasing the company at a reduced price, the truth is the brand has now been damaged to an extent where it’s too much of a liability. Investors lost trust in Aphria earlier in 2018 in a separate incident involving their Nuuvera acquisition, and while they might have forgiven a single mistake, this is the second time something like this has happened.
All it takes is for a single piece of bad publicity to absolutely destroy Aphria stock prices, whether entirely justified or not. As such, it’s hard to recommend Aphria for investors this year unless they’re interested in shorting the stock.
Insys Therapeutics
This drug developer already fell 90 percent in price in 2018, but in contrast to those who think it might now be a good deal, there’s still a strong chance its shares will plummet even further.
After the Insys Therapeutics (NASDAQ: INSY) pleaded guilty to encouraging doctors to prescribe their drug compound, reports indicated that up to 80 percent of the companies peak revenues of $330 came from this off-label use. Many corporate executives have been arrested, and the business now plans to sell their main – albeit reputationally damaged – product line Subsys.
One could go on about the numerous problems the company has. Last quarter, the company registered barely a million dollars in sales, down from it’s estimated $200 million. Most investors are already staying away from this company, but those that wonder if there is some value to be salvaged from this train wreck should be careful lest even more of their investments get wiped out hoping for a good deal.
Aurora Cannabis
This might shock many, but Aurora Cannabis (TSE: ACB)(NYSE: ACB) might not be as appealing as many believe it to be. Many investors are still caught up in the present paradigm of valuing production above all else. While Aurora is well on track to becoming a top producer, many industry analysts see the future of the industry being in branding and retail experiences.
In turn, major producers are expected to get boxed into roles as glorified farmers. Even if these companies wish to strategically pivot and expand on a retail level, there are too many big players that have already laid the groundwork in this area, giving them a head start that will prove almost impossible to catch up with.
While this train of thought focuses more on the long term, even short-term prices for Aurora remain questionable. Much of the company’s growth has come in the form of stock-based acquisitions, which has had the effect of diluting shares from 16 million outstand to soon almost 1 billion. As shares get watered down, prices remain unlikely to rise and might even fall. In short, Aurora isn’t the shining gem that many retail investors make it out to be.
Final Thoughts
There is no shortage of pot stocks that are damaged in some way. Most of the time, the biggest problem comes down to reputation. In an industry that struggles with mainstream acceptance, having anything less than a stellar image and brand is going to do a lot of damage.
In other cases, problems stem from other areas, like poor positioning, reckless expansion, or operating on aggressive losses. Keeping these things in mind and paying attention to these warning signs going forward will help you spot duds in the cannabis industry before most other investors do.
