2 Cash-Burning Businesses Investors Should Avoid

Inflation is a big problem this year. Products are more expensive for consumers, and businesses have to decide between whether to raise prices or eat the additional costs. Either way, it has the potential to negatively impact sales and hurt the bottom line.

For investors, it makes it more important than ever before to focus on companies that are generating positive cash flow and that have strong financials that can weather the storm. Two companies that don't fall in that category are Aurora Cannabis (NASDAQ: ACB) and ContextLogic (NASDAQ: WISH). These are two risky stocks that you probably don't want to be holding in your portfolio right now.

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1. Aurora Cannabis

Aurora Cannabis is a marijuana producer that's riddled with problems from top to bottom. Not only is it struggling to generate consistent sales growth, but cash flow is also a big problem. Just this month, it closed on an offering that generated gross proceeds of $172.5 million. The funds will be used for just "general corporate purposes," which essentially means anything and everything.

News of another offering for this serial diluter sent its shares tumbling to less than $2 a share. A possible reverse stock split looks inevitable for the business as there's little reason to expect that Aurora will get out of its tailspin anytime soon. The company has consistently reported negative cash from its day-to-day operating activities over the past few years:

ACB Cash from Operations (Quarterly) Chart

ACB Cash from Operations (Quarterly) data by YCharts.

Lacking a catalyst to turn things around, the cannabis company is in trouble. Investors should consider keeping a safe distance away from this pot stock as dilution and underperforming quarterly results could ensure more of a decline in the future.

2. ContextLogic

ContextLogic runs e-commerce site The stock was popular with meme investors early last year when it hit a high of more than $32. However, today, it's struggling to stay above just $2 a share. Sales have been falling sharply as the company has been undergoing many changes, including refocusing its efforts on improving the quality of the products that are available on its website -- something many consumers have complained about in the past.

While management has said that its net promoter score (NPS) has doubled since making improvements, that hasn't resulted in strong financials for the business yet. Sales for the first three months of 2022 totaled $189 million and declined a whopping 76% year over year. And like Aurora, the company is burning through tons of cash:

WISH Cash from Operations (Quarterly) Chart

WISH Cash from Operations (Quarterly) data by YCharts.

Far from its heyday, ContextLogic has fallen on some hard times, and inflation may only exacerbate the issues it is facing right now. Although the company has a strong cash and cash equivalents balance of $760 million as of March 31, if it keeps burning through cash at more than $100 million per quarter, that could not only shrink that balance but impede the company's recovery and its ability to reinvest funds back into its operations.

ContextLogic may still turn things around, but it's too risky of an investment to be holding onto right now.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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