Share Dilution

2 popular actions I would avoid right now

Following the crowd isn’t always a good idea – and that’s as true in the investment world as it is anywhere else. Sometimes a stock that is popular at one point can turn out to be a bad deal later. Investors who want to generate above-average returns over the long term should not take a position in a stock just because there is a lot of interest in it.

For example, consider Aurora Cannabis (NASDAQ: ACB) and Uber Technologies (NYSE: UBER) – two actions that are certainly popular in some circles at the moment. Both have regularly been on the list of the 100 most held stocks in the portfolios of those who use Robinhood Markets‘Exchange platform. But basically they are not worth investing in.

The case against Aurora Cannabis

Marijuana producer Aurora Cannabis has been plagued with problems for years, some of their own making and others caused by factors beyond their control. Let’s start with a problem in the latter category.

Aurora and her peers in the Canadian market believed they had found gold when cannabis was finally legalized there in late 2018. However, regulatory authorities complicated matters. For example, the province of Ontario – the largest in the country in terms of population – has implemented a complex lottery system that allows businesses to obtain cannabis retail licenses. This has had a severe impact on businesses in the space.

Image source: Getty Images.

Like Mark Zekulin, former CEO of Canopy growth said in November 2019: “… just doesn’t exist.”

While things have improved for almost two years since Zekulin uttered those words, this issue has contributed significantly to the headwinds faced by Aurora Cannabis.

Second, Aurora Cannabis has not been able to attract a reputable partner with deep pockets. It matters a lot. Marijuana companies have struggled to access most of the usual sources of business funding due to the nature of their business operations. This is why some have partnered with companies established in adjacent markets. For example, the tobacco giant Altria holds a 42% stake in Cronos Group, while the alcoholic beverage company Constellation brands owns 38.6% of Canopy Growth.

Aurora Cannabis appointed billionaire investor Nelson Peltz as strategic advisor in March 2019 to help it “explore potential partnerships that would be the optimal strategic solution for a successful entry into each of the market segments envisioned by Aurora”. But Peltz stepped down from that role in September 2020 and Aurora still doesn’t have a partner. Of course, the business could be successful without one. But it should be noted that a collaborator could be of great benefit to him, and when he tried to find one, he failed.

Third, from the start, Aurora Cannabis adopted an aggressive strategy that relied on making acquisitions after acquisitions. Since the company did not have the cash to fund its spending spree, it had to pay for these acquisitions in common stock. This has contributed significantly to the persistent dilution issues of Aurora Cannabis shares.

Amidst all of these issues, he consistently disappointed shareholders with his poor financial performance. And while the company is working to turn the tide (it is aggressively seeking to cut expenses and costs, for example), those efforts have yet to pay off consistently.

It is difficult to make a strong case for this cannabis stock at this time. Investors should stay away.

The case against Uber Technologies

Uber pioneered the carpooling business model, and it seemed like a great concept at first. But its drawbacks soon became evident. Uber is often accused of underpaying its drivers, most of whom are not classified as employees in the United States. , among others, while independent contractors are not.

Uber is currently engaged in an intense battle in California over legislation that would require the company to classify its drivers as employees there. And late last year, Seattle enacted a law stating that Uber drivers would be entitled to minimum wage from January 2021. Other states could follow suit, and regulators overseas. took note of it. Uber lost a lawsuit in the UK and, as a result, had to classify more than 70,000 drivers in the country as employees.

Person wearing a mask, holding a phone and standing on the side of the road.

Image source: Getty Images.

This cloud will hover over the head of the company – perhaps for many years to come – and put downward pressure on its share price. The company’s image is important, and as long as Uber has a reputation for not treating its drivers well, this is another risk for the company. On the other hand, neither can it afford a significant increase in operating costs, unless it increases its prices. Uber is currently not always profitable. Management says it expects to achieve quarterly adjusted EBITDA profitability this year, but that is not the same as net income.

The pandemic has added to Uber’s challenges. Blockages and social distancing efforts have dramatically reduced demand for rides – and therefore drivers. Even though things have returned to normal, many drivers who left the platform last year have not been eager to return. In April, Uber launched a $ 250 million wage hike initiative to attract drivers and couriers to its food delivery business. The company says it has made progress in this direction through this and other incentive programs.

But again, the company failed to achieve consistent profitability even when it was paying less. They may also be forced to spend more on benefits, unemployment insurance and making sure its drivers earn at least the minimum wage for their work.

Uber’s driver shortage may prove to be a temporary headwind, but the legal and regulatory challenges it faces are unlikely to be transient. The company’s economic model is based on its ability to assert that its drivers are not its employees. As long as the risk of losing this ability persists, I would recommend staying away from Uber’s stock.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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