Ticking Time Bombs: 3 Cannabis Stocks to Dump Before the Damage Is Done

Stocks to sell

The North American cannabis market is booming in 2023, thanks to the legalization of recreational and medical marijuana in several states and provinces. Many investors are betting on the growth potential of this industry, especially as cannabis may be moved to Schedule III from Schedule I of the Controlled Substances Act (CSA). This would ease the regulatory burden and increase access to banking and research for cannabis businesses.

Of course, not all cannabis stocks are created equal, and some of these cannabis market players have company-specific risks that could curtail their growth prospects. Below are three cannabis stocks investors should consider dumping this month.

SNDL (SNDL)

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SNDL (NASDAQ:SNDL) is one of the largest alcohol and cannabis retailers in Canada with 196 locations as of August 2023.  The company’s cannabis business, in particular, specializes in both cultivating and selling premium flower products. SNDL claims to have a differentiated approach to production, quality control, and customer experience. Furthermore, SNDL prides itself on its bespoke manufacturing capabilities which are able to adopt to a number of different product offering.

Though SNDL is surely one of the largest cannabis retailers in Canada by revenue, the cannabis retailer has not been able to generate substantial profits through its vertically integrated cultivation and production process. In their second quarter earnings print, gross margins came in around 21.2%, and SNDL only generated positive EBITDA on an adjusted basis, which also speaks to its genuine struggle to keep margins stable.

Although secular tailwinds exist for the cannabis market, SNDL is perhaps not the best investment for public equities investors looking to keep capital in an asset that will provide substantial yield. SNDL shares trading at $1.97 a share, well below its all-time high of $130.00 in 2019. Investors have already loss so much in that amount of time and are better off investing in other assets.

Tilray Brands (TLRY)

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Tilray Brands (NASDAQ:TLRY) is another large, Canada-based cannabis producer and distributor based with operations in Europe, Latin America and Australia. Similar to its competitor SNDL, Tilray has been struggling with expanding both revenue growth and profitability margins in recent years. As I wrote in a prior piece, Tilray’s fiscal year 2023 report showed an annual decline in revenue primarily due to higher competition in Canada, Tilray’s largest cannabis end-market.

It appears Tilray and the cannabis producer’s competition are all dealing, in one way or another, with a high-cost structure. While many investors choose to prioritize revenue multiples when examining cannabis stocks, it’s important to also examine trends in these companies’ profitability-related multiples in order to gauge how they can effectively return capital to shareholders over the long run.

Until Tilray has overcome its burdensome cost-structure, it will remain difficult to recommend the cannabis producer’s shares.

MedMen Enterprises (MMNFF)

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MedMen (OTCMKTS:MMNFF) is a leading cannabis retailer in the U.S. with a strong presence in California, Nevada, Illinois, Arizona, and Massachusetts. From its inception in 2010, the company was able to build a robust reputation for offering high-quality products and services to its customers, as well as a sleek and modern store design. However, a series of scandals and controversies, including those involving its former CEO, board members, and suppliers, have since then tarnished the company’s reputation.

Moreover, MedMen has had a history of burning through cash which has at certain moments forced the company to sell some of its assets and raise capital at unfavorable terms. The trend of burning through cash and putting assets up for sell has not abated. The cannabis producer’s “cash and cash equivalents” balance is again on the decline as of its latest Form 10Q, while it also had $41.1 million of assets up for sell during the same period.

MedMen’s shares are trading well below $1.0, which has given investing in the asset another dimension of risk. Investors desiring to make a cannabis play should definitely look elsewhere rather than playing the lottery on MedMen’s shares.

On the date of publication, Tyrik Torres did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Tyrik Torres has been studying and participating in financial markets since he was in college, and he has particular passion for helping people understand complex systems. His areas of expertise are semiconductor and enterprise software equities. He has work experience in both investing (public and private markets) and investment banking.