Last year, investing in cannabis stocks was a sure-fire way to turn a profit. This year, the results have been mixed.
While many cannabis stocks have continued higher, the market has finally had the chance to dive deeper into how each company operates. It turns out that not every cannabis company is the same.
While there still are attractive pot stocks out there, here are three to avoid.
Namaste Technologies (TSXV:N) Like nearly every marijuana stock, Namaste was caught up in 2018’s cannabis hype, ultimately surpassing a $1 billion market cap. Looking closer, this valuation was completely unwarranted.
In October, short-seller Citron Research revealed that it believes Namaste to be a “complete fraud.” It charged executives with operating a pump-and-dump scheme. Soon after, the CEO was fired.
Since Citron’s report, Namaste stock has lost more than 75% in value. After the drop, are shares now a value?
In total, it’s hard to know what to make of Namaste stock today. Recently, its board of directors decided to “consider all value-maximizing alternatives,” which is often code for selling the company. What Namaste could fetch these days is a mystery.
Namaste still has time to turn things around, but due to severe governance issues, it’s probably best to leave this unquantifiable risk to other investors.
Village Farms International (TSX:VFF)(NASDAQ:VFF) Village Farms is another former market darling. Earlier this year, the stock rose by nearly 500% in just 60 days.
Since hitting all-time highs, the stock has pulled back a bit, but not nearly as far as Namaste shares. Today, Village Farms still sports a market cap of $730 million.
What’s not to like? It turns out that Village Farms is yet another target of Citron Research.
Keep in mind that Citron isn’t bearish on the cannabis sector. In fact, it’s quite bullish. However, the firm has been able to do what few other investors have been able to accomplish: separate the real players from the fakes.
“We acknowledge that there are real players in the business,” Citron Research wrote in a recent report. “We put Village Farms in the category of pretenders.”
After reviewing the facts of the case, I’m in agreement with Citron on this one. The details are just too fishy.
For example, the company is charged with paying to promote its stock on Twitter as well as several unlicensed, unregistered penny stock recommendation services. Even worse, 18 senior executives have left the company since 2014, including three CEOs and three CFOs.
Village Farms stock may swing wildly based on hype for the cannabis industry, but this isn’t a company I want to trust my money with.
Aurora Cannabis (TSX:ACB)(NYSE:ACB) Aurora Cannabis isn’t a potential scam like Village Farms and Namaste. In fact, it’s one of the more trustworthy companies in the industry. The problem is valuation.
Armed with a $12 billion market cap, Aurora has been able to sell high-priced stock to make countless acquisitions. On April 3, it signaled that it would raise another $750 million.
Unfortunately, it doesn’t seem like this new money has been put to good use. Business Insider recently reported that many investors “complained that Aurora spent large amounts of money on numerous assets across the value chain, with perhaps little thought to which were best suited.”
The company has also had issues with execution, especially an inability to ramp production quickly and turn a profit. Not to mention the severe oversupply risk that it may face in a few years.
Aurora Cannabis isn’t a bad stock, but too much is still priced in. I’m waiting for a dip to buy shares.
Tom Gardner owns shares of Twitter. The Motley Fool owns shares of Twitter and Village Farms International, Inc. Fool contributor Ryan Vanzo has no position in any stocks mentioned. Village Farms is a recommendation of Hidden Gems Canada.
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