2019 was a wild ride for cannabis with multiple highs and hangovers. Tilray has been on a steady slope from the heavens to reality since it rang up $300/share in October of 2018. Today, Tilray closed at $15.83/share. Canopy Growth has whipsawed between $20/share and $53/share multiple times over that same period, and is now close to its 5-year low. MedMen, a popular cannabis retailer in California (and other states), saw its shares sink into penny stock territory in November 2019.
Have investors sobered up from the high valuations of October 2018? Were hedge fund’s profit taking responsible for the burning up of Main Street investors? Or are there fundamental headwinds that need to be factored in before leaping into pot stocks?
The end of 2019 was a period of sobering up for all companies, not just the marijuana industry. WeWork’s valuation was slashed from $47 billion to $8 billion. Unicorns, like Snap Inc., that have been cash negative for years are being required to show a clear path to profitability before accessing more capital. Ford bonds were downgraded to junk. After years of a free ride, bond and loan covenants were finally showing some backbone and demanding more than just an exciting story.
So, imagine trying to get funding if your product isn’t even legal at all in 17 U.S. states. Most cannabis companies get around this by basing themselves out of Canada. However, the legal issues, and rapidly changing landscape around THC, CBD, medical marijuana and recreational cannabis, complicate everything from banking and funding to product sales and distribution.
So, the companies with experienced, creative executives and board members have a competitive edge over founder/CEOs, particularly heading into 2020 when the industry has seen the traditional capital markets dry up. Aphria has Hain Celestial’s founder/CEO Irwin Simon at the helm. Tilray’s advisory board is stacked with international policy superstars. Medmen’s new CFO Zeeshan Hyder, whose background includes eBay, Citi, Eli and Edythe Broad, and First Bev, has initiated a 5-point plan to be EBITDA positive by the end of this year. Meanwhile, Canopy Growth’s founder/CEO Bruce Linton (in July 2019) got the boot and will be replaced with Constellation Brands’ former CFO David Klein.
Cannabis Has an Exciting Story
Aphria’s revenue growth was 849% year over year in the last quarter. Tilray’s revenue increased five-fold. Even with a pullback on CAPEX, Medmen is still planning on adding another 13 retail stores and doubling revenue in calendar year 2020 (on a run rate basis).
Canopy Growth was one of the few companies where sales were lower in the most recent quarter sequentially. In the 2nd quarter earnings call, CEO Mark Zekulin (who is leaving the company and being replaced by David Klein) dialed back on a target of having $250 million in revenue with 40% margins by the 4th quarter, saying that objective was “unlikely.”
Innovation and First-Mover Advantage
Innovation is also key to the next phase of the industry’s cycle. Canopy Growth’s partnership with Constellation Brands is expected to yield THC and CBD beverages as alternatives to traditional spirits. So, while the short-term will be sobering, once these products drop, if they are embraced as an alternative to beer and wine, then Canopy Growth’s star could shine. Tilray is releasing CBD beverages in partnership with Anheuser-Busch (Labatt Breweries) and Authentic Brands. Meanwhile, Cronos’ partnership with Altria is suffering from the health concerns surrounding vaping and Altria’s $4.5 billion write-down of their Juul investment.
Valuations, Cash Burn and Cash on Hand
In addition to understanding the product, the customer and who is running the show, it’s important for investors to buy low and sell high. It’s more difficult to know how to value companies that are in rapid growth mode and are largely cash negative. However, without a sound exit strategy, you might be stuck with expensive stock, when the company finds that it’s vision for the future was slightly impaired. (That’s one of the most common mistakes investors make: not having an exit strategy.)
As the industry is definitely in the middle of a capital crunch, it is also key to make sure that the enterprise isn’t flying too close to the trees and is well-capitalized. Additionally, there must be a pathway to profitability. Bruce Linton was booted because the board, with ample influence from Constellation Brands, wanted to see a more focused approach to growth. Mergers and Acquisitions are great for growth, however, only if they are rowing in the same direction and are complimentary to the existing product line.
The Bottom Line
Many cannabis stocks are trading near multi-year lows. However, picking the winners is still imperative to successful investing, as is being a patient buyer and an opportunistic seller.
Go to BlogTalkRadio.com/NataliePace to listen to my teleconference on Cannabis 2020. I’ll have another BlogTalkRadio update on January 23, 2020 at 9 am PT (noon ET). Aphria announces fiscal 2nd quarter 2020 results on January 14, 2020 at 8:00 am ET (before the markets open).
If you'd like to learn stock strategies, join me at my Stock Master Class Feb. 7, 2020 and my Investor Educational Retreat Feb. 8-10, 2020 in Cocoa Beach, Florida.
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Please note: Natalie Pace does not act or operate like a broker. She reports on financial news, and is one of the most trusted sources of financial literacy, education and forensic analysis in the world. Natalie Pace educates and informs individual investors to give investors a competitive edge in their personal decision-making. Any publicly traded companies or funds mentioned by Natalie Pace are not intended to be buy or sell recommendations.
ALWAYS do your research and consult an experienced, reputable financial professional before buying or selling any security, and consider your long-term goals and strategies. Investors should NOT be all in on any asset class or individual stocks. Your retirement plan should reflect a diversified strategy, which has been designed with the assistance of a financial professional who is familiar with your goals, risk tolerance, tax needs and more. The "trading" portion of your portfolio should be a very small part of your investment strategy, and the amount of money you invest into individual companies should never be greater than your experience, wisdom, knowledge and patience.
Information has been obtained from sources believed to be reliable however NataliePace.com does not warrant its completeness or accuracy. Opinions constitute our judgment as of the date of this publication and are subject to change without notice. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.
Natalie Pace is the co-creator of the Earth Gratitude Project and the author of The Gratitude Game, The ABCs of Money and Put Your Money Where Your Heart Is. She blogs on Huffington Post and Medium, and is a frequent guest contributor to national news shows and magazines. She has been ranked the No. 1 stock picker, above over 830 A-list pundits, by an independent tracking agency, and has been saving homes and nest eggs since 1999.