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Finance

Wall Street Analysts Advise Selling These 2 Cannabis Stocks

Several cannabis stocks have rallied this year on investor hopes of wider legalization, federal decriminalization and a growing adoption of marijuana in more states. But, unfortunately, not all stocks have convinced Wall Street  of their potential. While these stocks garnered significant attention from the same WallStreetBets Reddit army that contributed to GameStop’s epic short squeeze last month, their shares fell soon after the Reddit trade lost its momentum.

Although Cronos Group Inc. (CRON) and Aurora Cannabis Inc. (ACB) have precarious financials, they are trading at high valuations. We think these two stocks have abysmal growth opportunities because they are incurring losses at a time when most industry participants are growing their earnings at an impressive rate. Their weak business operations, stretched valuations and rising debt could lead to significant price decline in the coming months.

Considering these concerns,  Wall Street analysts are advising investors to sell these stocks. Hence, we think it’s better to avoid them at this juncture.

Cronos Group Inc. (CRON)

CRON is a cannabinoid company that operates in the United States and internationally. It is involved in the cultivation, manufacture, and distribution of cannabis-derived and hemp-derived products for the medical and adult-use market. The company sells its products through ecommerce, retail, and hospitality partner channels.

Last  year, CRON launched a leading medical brand, Peace Naturals, in Israel. This should  allow it to diversify its product portfolio by offering high-quality, affordable products to a larger consumer base.

CRON’s results for the third quarter ended September 30, 2020 were disappointing. It reported a gross loss of $1.54 million and an operating loss of $41.17 million in the third quarter ended September 30. CRON’s operating expenses rose 43.8% year-over-year to $39.63 million. Its net income declined 88.7% from the year-ago value to $68.46 million, while its EPS declined 88.8% year-over-year to $0.20.

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Although the stock has gained 55.7% over the past year, CRON appears to be extremely overvalued currently. In terms of its forward ev/sales, CRON is currently trading at 72.11x, 691.1% higher than the industry average  9.12x. Also, the company’s trailing-12-month price/sales currently stands at 115.63x, which is significantly higher than the industry average  8.70x.

In fact, CRON is  currently  trading 29.7% below its 52-week high of $15.83, indicating  short-term bearishness.

Of the seven Wall Street analysts that rated the stock, two rated it Strong Sell and two rated it Sell. Also, the consensus price target indicates a potential 54.1% decline.

CRON’s POWR Ratings are also consistent with its underperformance. The company has an overall rating of F, which translates to a Strong Sell in our proprietary ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

CRON has an F grade for Growth, and a grade of D for Stability and Value. In the C-rated Agriculture industry, it is ranked #31 of 32 stocks.

To see additional POWR Ratings for Momentum, Sentiment, and Quality for CRON, Click here.

Aurora Cannabis Inc. (ACB)

Headquartered in Edmonton, Canada, ACB is a producer and distributor of medical cannabis products worldwide. It produces various strains of dried cannabis and is also involved in the development of medical cannabis products at various stages of development. ACB’s brand portfolio includes Aurora, Aurora Drift, Daily Special, MedReleaf, CanniMed, and others.

Earlier last year, Jakubowitz Law, the Gross Law Firm and several other law firms filed a securities class action lawsuit against ACB on behalf of its shareholders.

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ACB’s consumer cannabis revenue declined 16.8% sequentially to $28.57 million in the fiscal second quarter, ended December 31, 2020. The company’s adjusted gross margin was 42% versus 48% in the prior year quarter. It reported an adjusted EBITDA loss of $16.80 million and a net loss of $292.79 million over this period.

ACB’s trailing-12-month ev/sales currently stands at 11.12x, 15.8% higher than the industry average  9.61x. The stock has declined 44.1% over the past year and is currently trading 43% below its 52-week high of $19.68, indicating  short-term bearishness.

Two Wall Street analysts rated it Strong Sell and two rated it Sell. The consensus price target for ACB indicates a potential decline of 33%.

The company’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall rating of D, which equates to Sell in our proprietary ratings system. ACB has an F grade  for Stability, Sentiment and Quality. In the F-rated Medical – Pharmaceuticals industry, it is ranked #219 of 238 stocks.

In total, we rate ACB on eight different components. Beyond what we stated above we have also given ACB grades for Momentum, Value, and Growth. Get all the ACB ratings here.

The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

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CRON shares were trading at $11.34 per share on Wednesday afternoon, up $0.21 (+1.89%). Year-to-date, CRON has gained 63.40%, versus a 4.46% rise in the benchmark S&P 500 index during the same period.

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About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More…

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