Cannabis stocks have shown unprecedented growth over the past year, fueled by increased investor awareness and a public thirst to end the wrongs of the prohibition era. Early investors scored easy wins this past year when a slew of legalization efforts led by California and Canada drove pot stock prices to obscene highs.
But speculation in an overcrowded market has led to some hyped-up valuations of otherwise hollow brands, and investors too afraid to miss out have skewed the market in favor of some lackluster holdings. Here are three overvalued, overhyped, risky marijuana stocks investors should avoid:
Supreme Cannabis Co. Inc.
Canadian Licensed Producer Supreme Cannabis hopes to differentiate itself as a pure play producer dealing in high-quality cannabis. The company’s primary asset, 7ACRES, is a 342,000 square foot facility designed to cultivate large-scale flower for the high-end segment. Late last year, Supreme announced the purchase of an approximately six-acre property next to the 7ACRES lot, with the goal of expanding their production by the end of 2019.
On the surface, the former Supreme Pharmaceutical Inc. appears to be a solid play, attracting investors with an almost $500 million market cap and a stock price that has more than doubled over the past year. A recent supply deal with Namaste Technologies Inc. subsidiary Cannmart gives the company some extra bona fides in an overcrowded market.
A capital-intensive business, Supreme’s first sales from the 7ACRES operation snagged the company $1.5 million on a net loss of $2.1 million. With such paltry sales, investors should question the company’s motives in expanding their grow operation, at the cost of $9.5 million no less. Furthermore, the company’s balance sheet includes $5.7 million in credit from trade partners; money that will come due at some point.
Supreme does little to stand out among its peer competitors in the market, making it a risk for investors considering the slew of pot stocks trading today.
Organigram Holdings Inc.
Organigram Holdings Inc. announced approval recently from Health Canada to expand its grow production facilities, leading to what the company hopes will be increased efficiency and improved yields. A mid-size player in the market, Organigram moved its focus away from dried cannabis to cannabis oils, a product that should provide the company with higher margins.
Moreover, Organigram recently announced an upward revision to production capacity forecasts, predicting that annual output will rise from 65,000 kg per year to 113,000 kg per year. “We are seeing some harvest yields that are more than 400 grams per square foot a year and have witnessed the quality, density and size of flowers improve tremendously,” said Greg Engel, company CEO when explaining the revised numbers.
Still, with a share price over three dollars, and a market cap just over $400 million Organigram is a risk for investors. Their size and output to date make them an easy target for one of the more prominent pot companies, which should leave investors questioning the long-term strategy. In an already overcrowded field, it is hard to see this small player standing tall in the end.
Aurora Cannabis Inc.
Second only to Canopy Growth Corp., Aurora Cannabis Inc. is known for their loud, boisterous, headline-grabbing deals. Their nearly three-month-long battle to acquire rival Cannimed Therapeutics played out as much in the press as it did in the boardroom. With a market cap in the billions and a stock price that has shot up exponentially over the past year, the company is the pot stock poster child that keeps investors swooning.
Aurora’s glamour project is an expensive grow palace known as Aurora Sky; an 800,000 square foot facility that expects to produce over 100,000 kg of dried cannabis once completed sometime around mid-2018. According to some experts, the project is critical to the company’s long-term growth – a necessary factor in shrinking their cannabis growing costs on a per gram basis.
To fund all of this expansion, Aurora has sought out Canada’s number one source of instant cash, bought deal offerings – as in more than one. According to one report, since 2014 the company’s share count has increased from just over 16 million to upwards of 375 million. That is a 2200 percent increase in just over three years; a warning sign for any investor. The numbers may be impressive today, but how diluted will investor shares become the next time Aurora needs capital?