The cannabis sector has been in trouble for many months now, and many of the companies in the industry were struggling with their stock prices even before the coronavirus pandemic hit. Now that the pandemic has sent the market into turmoil, investors need to be aware of the pot stocks to avoid at this point in time. Even before the coronavirus crisis hit, many marijuana companies had been suffering from a wide range of issues. Some of those included oversupply, a slow rollout of stores in certain geographies, and liquidity problems.
While it is true that the lockdowns have resulted in higher sales of cannabis products, it does not necessarily mean that all pot companies are going to benefit from the spike in demand. Even in a relatively rosier situation, the status of the pot stocks to avoid is expected to remain bleak. Investors who are interested in the sector could do well to first know what pot stocks to avoid before parting with their money. Such a strategy will help them eliminate some options first. On that note, here is a look at three pot stocks investors may want to avoid at this point.
3 Pot Stocks to Avoid: HEXO Corp (TSX:HEXO) (NYSE:HEXO)
HEXO stock has been in dire straits in recent weeks and is currently one of the pot stocks to avoid for investors. The trouble started back in mid-March when the company announced that its second fiscal quarter financial report was going to be delayed.
However, it should also be noted that the company is currently grappling with much bigger problems with its business. In the second quarter, revenue rose 17% sequentially to hit C$17 million, but losses increased. The net loss for the quarter stood at C$298.2 million, and that is the sort of figure that might scare away even the most daring investors.
HEXO has been diluting its stock considerably in order to raise fresh capital (and may continue to do so), another reason why investors may choose to stay from HEXO stock right now.
In a press release recently, the company announced that it might need additional capital to meet its obligations. Last week, HEXO raised $40 million through another public offering, which resulted in another heavy sell-off of the stock.
HEXO stock has fallen over 40% so far in April.
3 Pot Stocks to Avoid: Tilray Inc (NASDAQ:TLRY)
It might seem harsh to include Tilray among the pot stocks to avoid, considering the fact that the stock gained in excess of 100% since the middle of March up until this week. However, investors need to take a closer look at the company’s business. It should be noted that Tilray stock has still lost a lot of value over the past quarter, and that cannot be negated by the recent rally.
In Q4 2019, Tilray boosted its revenue by 100% from the year-ago period, but at the same time, the company’s losses widened as well. In the same quarter, the losses mounted to $219.1 million, which included an onetime impairment charge totaling $112.1 million.
In addition to that, the company’s cash position is also in a precarious state. As of now, it only has $96.8 million in cash. That will probably see it through three quarters in the best-case scenario, but Tilray will need to seek financing soon. If doing so dilutes its stock, then it could have a negative effect on TLRY.
3 Pot Stocks to Avoid: Cresco Labs Inc (CSE:CL) (OTCQX:CRLBF)
Lastly, investors could also consider avoiding Cresco Labs stock under the present circumstances. Things may have looked promising for the company at the start of the year, but times have since changed. One of the major problems Cresco is experiencing is its considerable cash burn. In the third quarter, the company spent $105 million on investments and operating expenses.
During the same period, the company only raised $55 million, which was partially done by issuing fresh shares and warrants. The company is expected to reduce its expenses in light of the current situation, but it remains to be seen if Cresco can continue as a business due to its weak cash position. As of September 30 last year, its cash balance fell to $82 million, which many investors may consider as a red flag.
Moreover, it is unlikely that the United States government is going to provide any relief to the cannabis industry. In such a situation, it could be prudent for investors to avoid Cresco stock at this time.
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