3 Volatile Large-Cap Hemp Stocks to Watch for 2020
Given everpresent market volatility, it’s become pretty clear that investing in cannabis and hemp stocks is a long-term play. There are several fundamental issues impacting the cannabis industry which will mean hemp stocks are expected to remain volatile in the near-term. Cannabis investors must remain vigilant about where to allocate their investments. There are times when even large-cap firms lack healthy business models and their long-term prospects look dim. However, there are still several exciting large-cap hemp stocks to consider investing in. What are the 3 volatile large-cap hemp stocks to watch for 2020?
Most cannabis companies are struggling with their overall business models as well as substantial profitability issues. Even if the company has immense growth opportunities, everything boils down to the bottom-line. And if they are far from offering returns to the investors, these pot stocks are best avoided – for now. Let’s discuss three such leading cannabis companies that are facing tremendous selling pressure are discussed below.
Aurora Cannabis: Pricing issues and lack of profitability pose a major threat
Aurora Cannabis (NYSE: ACB) is a large-cap hemp stock that has historically not seen a favorable response from investors and the latest quarterly results were certainly no exception. It is pretty evident now that the company is struggling to find it’s footing. It’s far from a break-even point and its financials are under significant pressure.
Moreover, Aurora is burdened with debt. The company has over CA$400 million of total debt due by 2024, but it’s EBITDA is still negative. At the end of the last quarter, its cash balance stood at CA$120 million which is inadequate to service this quantum of debt or finance it’s growth endeavors – especially since its burning cash at such an unsustainable rate. The hemp stock is also flooding the market with more equity and diluting shareholder value. In the last quarter, it’s stock issuance was north of CA$100 million.
The marijuana company’s road to profitability is also rocky. The Canadian cannabis market is dealing with oversupply issues and prices have hit rock bottom. While Aurora did receive a positive response to its Cannabis 2.0 products, there is immense competition in the market. Due to pricing pressure, the pot company will not be able to hit a very high threshold of revenue. In fact, it may have to sell at a loss.
Not to mention the legalization of recreational marijuana for many countries is still in limbo. Unless Aurora solves it’s financial woes or finds a partner with deep pockets, it will continue to face this selling pressure.
Canopy Growth: Weak financials stoke ongoing investor concerns
Canopy Growth (NYSE:CGC) is another mainstream cannabis stock that is witnessing increased sell-off and has already plunged over 12% in August, after mixed Q1 results.
The company’s revenue grew by just over 2% compared to the fourth quarter. On the other hand, nationwide cannabis retail sales in Canada rose 17% QoQ amid the pandemic. When we view Canopy’s revenue against this number, it is very meager – causing plenty of concern for the investors. Like Canopy, most pot companies are anyways struggling with profit and, if the revenue numbers aren’t as strong, growth investors start to panic.
Margins continue to be a cause for concern for Canopy. In the first quarter, the company’s gross margin rose to 7.1%, compared to 5% in the same period last year. The company aims to achieve a 40% gross margin which seems far-fetched at this point.
Is there any upside to an investment in Canopy Growth? The large-cap hemp stock has posted a narrower loss in Q1 due to aggressive cost-cutting. The cash burn rate also slowed during the period. Its partnership with Constellation Brands will help it withstand ongoing volatility and gain access to additional liquidity.
However, Canopy Growth has a long way to go before it regains investor optimism in the near-term.
Tilray: Wider losses lead to selling pressure
Tilray’s (NASDAQ:TLRY) latest results revealed that the cannabis company could be facing some serious trouble. In its second quarter, the pot producer’s net loss widened to $81.7 million compared to $36.3 million posted in the same period last year.
This raised investor concern and the stock plunged nearly 13% following the day. The loss increased primarily due to inventory write off and asset impairment charges. Though these are non-recurring charges – their quantum is significant.
On the revenue front, Tilray posted a 93% plunge in its bulk sales. The company indicated that it is moving away from bulk sales to focus on areas with better margin prospects. However, it is worth noting that Tilray’s international sales tripled in Q2.
It wouldn’t be correct to say that Tilray is in the doldrums. The company has a diversified business and its revenue isn’t dependent on a single stream. The financials were weak for the quarter and it surely makes it is a slightly riskier short-term investment for this large-cap hemp stock.
The Bottom Line
Hemp stocks have to ensure they improve profit margins before they run out of cash. As cannabis is illegal at the federal level in the U.S. raising debt capital remains an everpresent challenge. Raising equity capital results in investor dilutions. The cannabis segment can be compared to the dot com boom of 2000 which had multiple players at its peak but just a few survivors after the bloodbath was over.
Investors need to identify hemp companies that have a huge market presence and are focused on improving profitability which will give them ammunition to expand and hit profitability.
3 Volatile Large-Cap Hemp Stocks to Watch for 2020
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