2 Once-Hot Growth Stocks That Wall Street Thinks You Should Avoid

Investors on Main Street and Wall Street frequently have clashing ideas on which stocks are the most likely to be good growth investments.

Even if they aren’t always right, it’s usually a smart idea to at least consider what professional stock analysts are saying about a company as they typically have access to all sorts of fancy financial models that you don’t. Plus, analysts often have opportunities to chat with management, not to mention other industry experts who can bring a significant amount of insight to the table.

In particular, there are a pair of cannabis businesses that many investors are looking to for growth in 2023 and beyond. But analysts are decidedly less-than-bullish on their prospects, and with good reason. Let’s take a look and see if their perspective is persuasive, because it might end up saving you some money if you were seriously considering an investment. 

1. Aurora Cannabis

With a catastrophic decline of 96.6% over the last three years, Aurora Cannabis (ACB 2.26%) is a stock that’s burned countless investors. At the moment, the Canadian cannabis cultivator has an average recommendation rating from Wall Street analysts that’s a hair better than hold. That means they don’t think it is an attractive purchase, to say the least. There are a few reasons why the analysts might be right, starting with the dim prospects for the company’s revenue growth in its 2023 and 2024 fiscal years. 

On average, the analysts are expecting $146.2 million in revenue for 2023. Aurora’s 2022 fiscal year brought in $174.8 million, which implies top-line growth of around 19.5%. The problem is that Aurora’s quarterly revenue is actually declining; in the last year, quarterly sales dipped by more than 21.5%.

Management says that the drop was caused by a combination of employees going on strike, a cyberattack, and a decline in its low-margin product sales. But in fact the company’s revenue has been trending downward over the last three years, so these latest issues appear to be tangential.

Another bearish factor is that the entire Canadian cannabis market is swamped with excess marijuana, which is driving down selling prices. The oversupply won’t last forever, but for now, it makes predictions for top-line growth a bit harder to believe.

The door is still open for Aurora’s profitability to rise if consumers opt for higher-margin marijuana products like edibles or distillates, though. So don’t be too surprised if the company manages to meet its goal of reaching positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) before the end of the 2022 calendar year thanks to its ongoing shift to higher-margin goods and cost-saving measures.

Nonetheless, given that there are many other growth stocks that don’t face the same set of headwinds in the near term, it’s probably for the best to go along with analysts and avoid this stock for now. The risk of Aurora continuing to shrink is quite high, and there isn’t much reason to expect relief from simultaneous top- and bottom-line pressure anytime soon. 

2. Canopy Growth

Canopy Growth (CGC 1.32%) is another Canadian marijuana stock whose losses of 74% in 2022 have left shareholders in the lurch. Much like Aurora Cannabis, Canopy’s quarterly revenue declined 19.2% compared to a year ago, and its three-year quarterly revenue growth is slightly worse than flat with a decline of near 3.7%. 

Thanks to being subject to the same detrimental forces as Aurora in the Canadian market, Canopy is disfavored by analysts, who rate the stock as just barely above being a sell, on average. In its 2022 fiscal year, it brought in just over $415 million in sales, but analysts are expecting a mere $342 million for 2023. That makes sense because 2023 will be a transitional year for the company as its sell-off of its Canadian retail operations will result in a declining market share. So it won’t be exposed to poor conditions in the Canadian market for much longer.

Canopy’s fortunes might improve if its plans to enter the U.S. market via the formation of a new holding company and making a trio of acquisitions come to fruition. Shareholders will need to approve the plan first, which could happen sometime in 2023. There isn’t any particular cause to think that the plans will falter, but there is a significant execution risk whenever a business enters a new market, and Canopy’s lackluster performance in Canada doesn’t provide much in the way of reassurance. 

Therefore, much like Aurora Cannabis, Canopy Growth is a growth stock that investors might want to follow Wall Street’s lead on and avoid buying for now, even if it’s worth keeping an eye on in anticipation of a future turnaround.

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