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Trading volume of pot has also declined, suggesting that there is less appeal to retail investors hoping to score big gains from the market for legal marijuana.Tara Walton/The Canadian Press

Deeply depressed share prices can appeal to contrarian investors, but the marijuana sector is saddled with an unfortunate problem that might deter bargain hunters: Sales are not living up to expectations.

Regardless of which pot stock you look at, prices are down a lot.

Canopy Growth Corp. (WEED-T), once embraced as a leading marijuana producer, is down 91 per cent over the past three years. Tilray Inc. (TLRY-Q), which surged to US$300 a share in 2018, is now trading below US$4.50.

And if diversification across the sector looked like a safer approach, the Horizons Marijuana Life Sciences ETF, an exchange-traded fund that tracks 40 stocks, is down 35 per cent this year alone and carving out new lows.

Trading volume has also declined, suggesting that there is less appeal to retail investors hoping to score big gains from the market for legal marijuana.

The number of Canopy shares trading hands most days this year is about a quarter of what it was during the stock’s more popular – and financially rewarding – days in 2018.

Canopy’s quarterly financial results last week merely underscored the negative outlook, and offered a compelling reason to avoid the company’s peers as well: Sales in this era of legalized marijuana are struggling.

In the company’s fiscal fourth quarter, ended March 31, Canopy reported net revenue of $111.8-million, down 25 per cent from the same period last year and down 21 per cent from the previous quarter.

It continues to lose a lot of money on these sales: The company reported an adjusted EBITDA loss of $121.8-million during the quarter, $28-million more than the same period last year, owing to lower sales and declining margins. (EBITDA stands for earnings before interest, taxes, depreciation and amortization.)

Though the company had $1.4-billion in cash and short-term investments at the end of the quarter, this financial buffer is down by $900-million over the past year because of EBITDA losses and capital investments.

A few years ago, when investors were excited for the prospects of legalized marijuana consumption in Canada, losses weren’t a big concern among analysts and investors. Companies were spending heavily to gain market share and build brand identification. Profits would follow, especially if the United States legalized consumption at the federal level.

Now, dismal financial results and pushed-out targets for achieving some level of profitability is wearing on investor sentiment. It doesn’t help that this is happening at a time when interest rates are rising and investors appear to be more risk-averse.

“Some assets in Canopy’s portfolio have value, but we believe the company has built a strategy dependent on U.S. legalization, where prospects have worsened,” John Zamparo, an analyst at CIBC World Markets, said in a note.

The White House appears to have lost interest in legalization and Congress remains gridlocked.

Yet, he noted, Canopy’s stock trades at 4.7 times estimated 2023 sales, making it more expensive than peers and at odds with a balance sheet that is looking more precarious. Its net cash position, after accounting for debt, of $4.1-billion in 2018 is now a net debt position of $135-million.

“Even if Canopy hits positive EBITDA, annual cash burn will be nearly $200-million from debt servicing and capital expenditures alone,” Mr. Zamparo said.

Matt Bottomley, an analyst at Canaccord Genuity, maintained a “sell” recommendation on the stock, and cut his price target – or where he believes the shares will trade within 12 months – to $4.50 from $6.

“Looking ahead, we believe the company’s net-debt balance will likely steadily increase in the coming year[s] as the company continues to utilize its cash coffers to fund what continues to be sizable operating losses,” Mr. Bottomley said in a note.

Canopy is not an outlier here, as the entire sector faces growth rates that are falling sharply.

According to Frederico Gomes, an analyst at ATB Capital Markets, cannabis sales growth slowed to just 21 per cent in the first quarter of 2022, year-over-year. That’s down from 73-per-cent year-over-year growth in the first quarter of 2021, and 189 per cent in the previous year’s first quarter.

Bargain hunters may want to wait this one out.

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