With the volatility that we continue to see in marijuana stocks, we can get a clear picture that this sector is more of a bet and less of an investment decision.
And in all my years of investing and analysis on companies and stocks, I have learned that the consideration of downside risk is just as — if not more — important than the consideration of upside potential. It may not sound all that exciting, but it is much worse to lose a big chunk of your hard-earned money than it is to miss out on upside.
In any case, every investor will make that decision for themselves depending on what they are comfortable with.
At the time of writing today, Friday, marijuana stocks are trading to the downside again after some big upside earlier in the week, capping off another week of extreme volatility.
Canopy Growth (TSX:WEED)(NYSE:CGC) has been up 8% in the last five days, down 55% in the last month, and it has more than doubled in the last year.
Aurora Cannabis (TSX:ACB)(NYSE:ACB) has been up 1.6% in the last five days, down 28% in the last month, and it has also more than doubled in the last year.
Finally, Aphria (TSX:APHA)(NYSE:APHA) has been flat in the last five days, down 8% in the last month, and it has doubled in the last year.
While these marijuana stocks have been good for many shareholders, it has been a very volatile and difficult-to-predict ride.
With Canopy Growth reporting earnings next week, my view is that there is more downside risk to Canopy Growth’s stock price than upside.
It has been well publicized that there have been marijuana shortages and delivery challenges as well as continued upfront investments in growth and equity dilution.
Will the black market be so easily replaced given the inconveniences of the legal market so far?
All these issues are likely to place pressure on upcoming earnings results. Current consensus expectations are calling for a loss of $0.11 in the quarter, following a first-quarter loss of $0.40, which was well below expectations.
Latest results from Aphria showed an adjusted EBITDA loss of $4 million versus a gain of $2 million a year ago.
So, given this pressure, as well as the sky-high expectations that investors are placing on the stock and its current valuation, the downside risk is still big.
Interest rates are rising quickly, and this decreases the net present value of stocks, leaving especially significant downside for the most highly valued stocks in the market.
Canopy’s results will be released on November 14.
Fool contributor Karen Thomas has no position in any of the stocks mentioned.