Is This Pot Stock in Trouble?

Amid all the excitement surrounding pot stocks, oftentimes the fundamentals get lost in the noise. And that can be dangerous because while companies like Canopy Growth (TSX:WEED)(NYSE:CGC) are generating strong results and expanding into various parts of the world, the growth prospects become very exciting for investors.

However, it’s important to have some skepticism and not get caught up in the promises of what future growth might bring. After all, there’s no guarantee that actuals will meet expectations. For Canopy Growth, we’ve already seen the company miss the mark — by a lot. And although the company has recovered from that and revenues are growing at an incredible rate, it has still continued to produce operating losses and negative cash flow.

Cash is a big problem in the industry, as companies like Canopy Growth are bleeding through a lot of it and that creates a need to either take on debt or issue shares. The former adds interest expenses and obligations while the latter dilutes existing shareholders, leaving neither option desirable. That’s why many of these acquisitions in the industry are all-stock deals since it’s easier than dipping into the limited supply of cash that a company may have.

In Canopy Growth’s case, it has Constellation Brands as a big investor in the company to help its growth in various ways. Other companies are in a bit more difficult situations and can be risky for investors. For instance, MedMen Enterprises (CNSX:MMEN) is one company that has also been burning through a lot of money, as it continues to expand its business. In just the past four quarters, the company has used up $175 million in operations and over that time has had negative free cash flow of $277 million.

The pressure has been evident on the MedMen’s balance sheet as well. As of the close of 2018, the company had non-current liabilities totalling $87 million on its books compared to $3.6 million only six months earlier.

MedMen’s ex-CFO has been accused of being wasteful with money; certainly, the financials don’t resemble a company that’s being careful with its funds — operating expenses in MedMen’s most recent results were up 633%, with general and administrative costs leading the way and up over $56 million in just one year. While the company’s growth will certainly be a big factor in the rapidly increasing expenses, investors should expect more and shouldn’t be ready to excuse everything in the name of growth.

Bottom line

MedMen’s stores have proven to be very popular with customers, but if investors are buying part of a business, they should be comfortable with all parts of it, and that includes its cash flow and expenditures. From what I’ve seen on its financials, there are too many red flags and question marks that prevent me from investing in MedMen, regardless of how much potential there might be in the U.S. market.

This is a stock I’d keep a close eye on going forward because if MedMen’s share price struggles, it’ll only be more difficult for the company to raise the capital it needs to fund its growth and operations, which will only compound its existing problems.

You might be missing out on one of the biggest opportunities in Canadian investing history…

Marijuana was legalized across Canada on October 17th, and a little-known Canadian company just unlocked what some experts think could be the key to profiting off the coming marijuana boom.

Besides making key partnerships with Facebook and Amazon, they’ve just made a game-changing deal with the Ontario government.

One grassroots Canadian company has already begun introducing this technology to the market – which is why legendary Canadian investor Iain Butler thinks they have a leg up on Amazon in this once-in-a-generation tech race.

This is the company we think you should strongly consider having in your portfolio if you want to position yourself wisely for the coming marijuana boom.

Learn More About This TSX Stock Now

More reading

Fool contributor David Jagielski has no position in any of the stocks mentioned.

Source: The Fool
Is This Pot Stock in Trouble?
The Fool

The Motley Fool
Contributor for
The Motley Fool is dedicated to helping the world invest — better. Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, mutual funds, and premium investing services.

In all we do, we take a different approach.

We believe – and have proven over decades – that the individual investor can beat the market.

We believe that anyone can do it, even if they don’t have a lot of time or money to devote to investing.

We believe in a long-term outlook, helping people build wealth over time.

We believe that the person best positioned to take care of your financial future is you.

And we work tirelessly on behalf of our hundreds of thousands of members who are enjoying the opportunities that come with having enough money to do the things that matter to them.

While we are headquartered in Alexandria, Va., The Motley Fool advocates for the individual investor around the globe with offices in the UK, Australia, Canada, Singapore, and Germany.

Related posts