Despite the increasing legalization of cannabis across the United States, economic and industry-specific headwinds, including a supply glut amid high inflation impacting the overall demand, made 2022 a challenging year for the industry. These challenges are expected to continue through the end of this year. Hence, I think fundamentally weak cannabis stocks Tilray Brands, Inc. (TLRY), Canopy Growth Corporation (CGC), and Sundial Growers Inc. (SNDL) are best avoided now.
Before delving deeper into the fundamentals of these stocks to substantiate why one should avoid them, let’s see what’s happening in the cannabis space.
The legalization of cannabis is gaining momentum in the United States. The medical use of cannabis has been legalized in 39 U.S. states and the District of Columbia (D.C.). Also, the recreational use of cannabis has been approved in 21 states and D.C. In Canada, cannabis is legal for both recreation and medical purposes.
Despite increasing legalization, economic headwinds, and industry-wide challenges, including overproduction, made 2022 a tough year for the cannabis industry.
Wholesale and retail prices tumbled sharply last year as companies in the U.S. and Canada had to work through stubborn supply gluts. Like Colorado, Michigan, Oregon, and Washington, adult-use cannabis prices fell drastically in Massachusetts as the market hit oversaturation points. In addition, Canadian cannabis wholesale prices declined more than 40% in 2022.
Furthermore, according to the latest data released by Statistics Canada, consumer sales of recreational cannabis products in November 2022 fell in every Canadian province and major city. Overall, the country witnessed a 4.3% decline in adult-use sales to CAD373.30 million ($277 million) in November, marking the second consecutive monthly decline.
High taxes and growing barriers to interstate commerce continue to challenge the marijuana industry. Also, higher costs for fertilizers, raw materials, and packaging, along with rising inflation and growing concerns over a looming recession, will significantly hurt the industry this year.
Let’s discuss why TLRY, CGC, and SNDL could underperform in the months ahead.
Tilray Brands, Inc. (TLRY)
Headquartered in Leamington, Canada, TLRY researches, cultivates, produces, markets, and distributes medical cannabis products internationally. The company operates through four segments: Cannabis Business; Distribution Business; Beverage Alcohol Business; and Wellness Business.
TLRY’s trailing 12-month gross profit margin of 20.59% is 62.9% lower than the industry average of 55.54%. Likewise, the stock’s trailing 12-month EBITDA margin of negative 11.43% compares to the industry average of 3.56%. Also, its trailing-12-month CAPEX/Sales of 2.95% is 35.7% lower than the 4.58% industry average.
For the fiscal 2023 second quarter ended November 30, 2022, TLRY’s net revenue decreased 7.1% year-over-year to $144.14 million. Its operating expenses increased 4.1% year-over-year to $91.92 million. Its operating loss was $51.79 million for the quarter. In addition, the company’s adjusted net loss and loss per share came in at $35.31 million and $0.06, respectively.
Analysts expect TLRY’s revenue for the fiscal year (ending May 2023) to decline 3% year-over-year to $609.53 million. The company is expected to report a loss per share of $0.28 for the same period. Moreover, TLRY missed its consensus revenue estimates in three of the trailing four quarters.
Furthermore, the company is expected to report a loss per share of $0.14 for fiscal 2024. Over the past year, the stock has plunged 48.9% and 12.6% over the past six months to close the last trading day at $2.77.
TLRY’s POWR Ratings reflect this bleak outlook. The stock has an overall F rating, equating to a Strong Sell in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
TLRY has an F grade for Value, Momentum, and Sentiment. It also has a D grade for Stability and Quality. In the D-rated Medical – Pharmaceuticals industry, it is ranked #167 of 168 stocks.
Click here to see the additional POWR Ratings for TLRY (Growth).
Canopy Growth Corporation (CGC)
CGC, headquartered in Smith Falls, Canada, produces, distributes, and sells cannabis and hemp-based products for recreational and medical purposes, primarily in Canada, the United States, and Germany. The company operates through two segments: Global Cannabis and Other Consumer Products.
On February 9, 2023, CGC announced a transition to an asset-light model in Canada by exiting cannabis flower cultivation in the company’s Smiths Falls, Ontario facility, ceasing the sourcing of cannabis flower from the Mirabel, Quebec facility, and moving to a third-party sourcing model for cannabis beverages, edibles, and extracts.
These changes came in addition to multiple cost reduction activities within FY2023, including the divestiture of Canopy Growth's Canadian retail operations, the organizational restructuring of certain corporate functions, and the closure of the Scarborough, Ontario, research facility. This is expected to impact the company’s operating revenues and growth.
CGC’s trailing 12-month gross profit margin of negative 5.80% compares to the industry average of 55.50%. Also, the stock’s trailing-12-month EBITDA margin of negative 93.59% is significantly lower than the 3.56% industry average.
CGC’s net revenue decreased 28.2% year-over-year to CAD101.21 million ($74.41 million) in the fiscal 2023 third quarter that ended December 31, 2022. Its operating loss widened 2.5% year-over-year to CAD153.76 ($113.05 million). The company’s net loss and loss per share worsened by 130.8% and 92.9% year-over-year to CAD266.72 million ($196.09 million) and CAD0.54.
Street expects CGC’s revenue for the fiscal year (ending March 31, 2023) to decrease 21.8% year-over-year to $320.01 million. Also, the company is expected to incur huge losses for fiscal 2023 and 2024. Furthermore, CGC failed to surpass the consensus EPS estimates in each of the trailing four quarters.
Shares of CGC have declined 26.2% over the past month and 66% over the past year to close the last trading session at $2.28.
CGC’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall rating of F, translating to a Strong Sell in our proprietary rating system.
The stock has an F grade for Momentum, Stability, and Sentiment and a D for Value. Within the same industry, CGC is ranked #163. To see additional POWR Ratings of CGC for Growth and Quality, click here.
Sundial Growers Inc. (SNDL)
SNDL engages in the production, distribution, and sale of cannabis products in Canada. The company operates through Cannabis Operations and Retail Operations segments. It provides its products under the Top Leaf, Palmetto, Sundial Cannabis, and Grasslands brands. It is headquartered in Calgary, Canada.
On February 13, 2023, CEO of SNDL, Zach George, said, “Oversupply and excess capacity have resulted in high-quality flower being widely available and sold well below the marginal cost of production.” Citing the industry-wide overproduction, the company announced eliminating about 85 employees and scaling back activity at a production facility in Olds, Alberta.
SNDL’s trailing 12-month gross profit margin of 19.07% is 65.6% lower than the industry average of 19.07%. Likewise, the stock’s trailing 12-month EBITDA margin of negative 7.74% compares to the industry average of 3.56%.
For the third quarter that ended September 30, 2022, SNDL’s loss from operations widened 365% year-over-year to CAD88.54 million ($65.10 million). Its net loss came in at CAD98.84 million ($72.67 million) compared to a net income of CAD16.71 million ($12.29 million) for the same quarter in 2021. Its loss per share was CAD0.41, compared to an EPS of CAD0.08 in the prior-year quarter.
As of September 30, 2022, the company’s cash and cash equivalents stood at CAD291.43 million ($214.26 million) versus CAD558.25 million ($410.43 million) as of December 31, 2021. Also, its total liabilities were CAD318.74 million ($160.82 million), compared to CAD98.13 million ($72.15 million) as of December 31, 2021.
The company’s loss per share is expected to widen by 19% from the previous year to $0.65 for the fiscal year that ended December 2022. It is expected to report a loss per share of $0.06 for fiscal 2023. The stock has plunged 24% over the past six months and 62.8% over the past year to close its last trading session at $1.90.
SNDL’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall D rating, which equates to a Sell in our proprietary rating system.
The stock also has an F grade for Momentum and Stability and a D for Sentiment. It is ranked #129 in the same quarter.
In addition to the POWR Rating grades just highlighted, you can see the SNDL’s rating for Growth, Value, and Quality here.
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TLRY shares fell $2.77 (-100.00%) in premarket trading Monday. Year-to-date, TLRY has gained 4.09%, versus a 5.90% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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