This is the absolute worst marijuana stock money can buy

mArihuana projects as one of the fastest growing industries in the next decade.

According to a recent report by New Frontier Data, US cannabis sales are expected to grow 21% annually between 2019 and 2025, reaching $ 41.5 billion by the middle of the decade. Meanwhile, cannabis industry analyst BDSA is targeting Canada to generate up to $ 6.4 billion in annual cannabis sales by 2026, up from $ 2.6 billion in 2020. Add Mexico, which is now the green The flag is waving on recreational cannabis, and it’s easy to see how the North American marijuana market could reach $ 50 billion in sales by 2025.

With sales of legal cannabis expected to grow by a double-digit annualized percentage over the decade, Marijuana stocks are a natural favorite of investors.

Image source: Getty Images.

Not all cannabis stocks are going to be winners

On the flip side, we also know that not every company involved in a next-big-thing investment is going to be a winner. If you’d asked me six months ago to make a list of pot stocks worth avoiding, I would have had no problem making candidates.

Canadian license manufacturer Aurora cannabis (NYSE: ACB) has long been a marijuana stock investors should avoid. Aurora’s management team has an uncomfortable habit of citing its common stock as a collateral for acquisitions and financing of day-to-day business. Between mid-June 2014 and late 2020, Aurora’s outstanding shares rose more than 13,500%.

Plus, Aurora Cannabis is nowhere near profitable, despite some massive cost cuts that have caused facilities to close and jobs to be lost. Management also has its goal of positively adjusted EBITDA across the board on a number of occasions.

And it’s not just Canadian license producers that can be bad news for investors. US multi-state operator MedMen company (OTC: MMNFF) was created as one of the worst run cannabis companies. The previous management of MedMen proved far too overzealous with the company’s expansion plans and ruined its balance sheet. Without capital injections from Gotham Green Partners, MedMen is barely solvent today.

Even wealthy pot stocks would make the list. Despite a $ 1.8 billion stock investment by the tobacco giant Altria Group in March 2019, Cronos group (NASDAQ: CRON) was primarily a money pit for investors. The acquisition of cannabidiol-based beauty brand Lord Jones in 2019 seems to have paid too much, and so does his Cultivation activity is so minimal, relative to its market cap, that the company only recently posted net sales of more than $ 10 million for its first quarter.

A smoldering cannabis bud that is beginning to turn black.

Image source: Getty Images.

This is arguably the worst pot stock to buy

The point is, there are a lot of bad marijuana stocks out there – but one is way ahead of the crowd. In my opinion, penny stocks are the absolute worst pot stocks money can buy Sundial growers (NASDAQ: SNDL).

Sundial, a Canadian licensed manufacturer, is up approximately 1,000% since the end of October due to three developments. First there was Joe Biden’s win in November and the following Democrats retake the Senate in early January. Democrats are far more positive about cannabis than Republicans, which makes it more likely that we will see some sort of federal cannabis reform in the coming months or years. Sundial investors keep their fingers crossed for US legalization that would allow all Canadian growers to enter the US weed market.

Second, investors seem pleased with the cleanup of Sundial’s balance sheet. On March 15, the company had CA $ 719 million (approximately $ 580 million) in unlimited cash. This means Sundial has more than enough capital to run its growth initiatives.

Third, Sundial has benefited from being a core stake in the retail-focused Reddit craze. It was consistently one of the most short-sold stocks of 2021, making it a perceived candidate for one short press among Reddit merchants.

While all three factors explain why Sundial Growers made a four-digit profit in six months, they nowhere near justify the move.

A magnifying glass held over a company's balance sheet.

Image source: Getty Images.

Before Sundial, I thought Aurora Cannabis was one of the worst serial thinners I’ve seen, but Sundial takes the cake. While at the time of this writing I am still waiting for the company’s official stock count through its annual report in Canada, I would estimate that Sundial has at least 1.66 billion shares outstanding after exercising 98.3 million warrants last month. This implies that the company increased the number of shares outstanding by over 1.15 billion shares in about five months. I know its Canadian $ 719 million in cash looks attractive, but I understand it was built by burying its most loyal followers under an avalanche of new stocks.

With such an overwhelming dilution, there are two things to consider. First, if Sundial reverses the turnaround in profitability, it will have to make $ 17 million (about $ 13.7 million) in profit just to make a single penny of earnings per share. Given that the company only generated $ 60.9 million in net sales ($ 49.1 million) last year, it’s very unlikely that we will ever make any significant earnings per share of Sundial.

Second, since the company also has a $ 1 billion mixed offer, that dilution is almost certain to continue. It should be noted that the stock price is irrelevant and the market capitalization counts. Right now we’re looking at a company with a market capitalization of $ 2.6 billion (that’s the US) that didn’t even have $ 50 million in net sales last year. Sure, it may have what feels like a low stock price. But investors pay roughly $ 2 billion (excluding cash) for a company that does not nearly profitable, posted reverse net sales in 2020 and continues to dilute its shareholders. In other words, sundial is again a good candidate fall well below the minimum share price of $ 1 required for further listing on the Nasdaq Exchange.

The emotions of young retail investors seem to be the only thing keeping Sundial Growers stock above $ 1. If investors really looked at this company’s operating performance and record, I believe they would come to the same conclusion: Sundial is absolutely the worst marijuana stock money can buy.

Here is the marijuana stock you’ve been waiting for
A little-known Canadian company has just figured out what some experts believe could be key to capitalizing on the coming marijuana boom.

And don’t make a mistake – it’s coming.

Cannabis legalization is spreading across North America – 15 states plus Washington, DC have legalized all recreational marijuana in recent years, and full legalization came to Canada in October 2018.

And a Canadian company that’s under the radar is about to explode from this coming marijuana revolution.

Because a groundbreaking deal has just been made between the Ontario government and this powerful company … and you must hear that story today, if you ever thought about investing in pot stocks.

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Learn more

Sean Williams has no position in any of the stocks mentioned. The Motley Fool recommends Nasdaq. The Motley Fool has one Confidentiality Policy.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.

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