This article was updated on August 8, 2017, and originally published on March 13, 2017.
Legal marijuana sales in the U.S. surged to $6.9 billion last year and are expected to more than double a few short years from now. As one of America's largest growers, Medical Marijuana Inc. (MJNA 0.75%) might seem like a great way to invest in this trend, but banks and funds continue to avoid its shares.
Bigger players aren't shunning marijuana-related stocks as the whole. For example, GW Pharmaceuticals, a biotech developing a cannabinoid for the treatment of epilepsy, sports a market value worth billions, and the vast majority of its shares are currently held by institutions.
At the end of June, institutions owned just 0.01% of Medical Marijuana Inc.'s outstanding shares. You should never blindly follow other investors, but taking a little time to understand their actions is usually worth the effort. Read on to see why this stock is being shunned before making up your own mind.
Not in the majors
The fact that Medical Marijuana Inc. is a penny stock traded over-the-counter might be the biggest reason banks haven't shown much interest. Plenty of companies list their shares on the OTC markets for perfectly legitimate reasons, but the exchange's relative lawlessness as compared to the NYSE and NASDAQ exchanges makes it a haven for fraudsters.
One convenience the company enjoys is the ability to maintain a stock price below $1.00 for extended periods, which would lead to delisting from a major exchange. Although issuing new shares is a perfectly acceptable way to raise capital, doing so nearly always lowers stock prices. Without the threat of delisting to encourage fiscal discipline, Medical Marijuana Inc. has raised its share count about 1,317% from the end of 2009 through the end of March 2017.
Although an OTC listing doesn't require the disclosure of any financial information to investors, Medical Marijuana Inc. files quarterly reports and independently audited annual statements. It doesn't take an expert to spot the big problem that would keep away institutional investors: It's losing money.
In 2014, the company recorded a $2.6 million operating loss, and in 2015 that that figure grew to $3.6 million. After losing $1.2 million in the first quarter this year, the company's bottom line is clearly on the wrong trajectory.
In recent years, Medical Marijuana Inc.'s operations have expanded from financial and consulting services related to the medical marijuana industry to include development, sale, and distribution of a variety of products derived from hemp oil, including chewing gum for pain management. The company used a combination of its own shares and debt to acquire these operations.
Although operating losses appear to have stabilized last year, interest expenses associated with servicing its debts are surging. Medical Marijuana Inc. spent $0.99 million servicing its debt in 2014, $3.0 million in 2015, and $1.15 million in the first three months of 2017 alone. Interest expense isn't an operating expense, so this red ink gets piled onto operating losses.
Don't hold your breath
Investors bullish for this stock point to the rapid expansion of the sorts of marijuana sales that the company intends to avoid until federal laws are relaxed. I think a history of poor execution with its present businesses suggests entering the medical and recreational markets will only lead to further losses.
Medical Marijuana Inc. is more optimistic and considers itself well-positioned for eventual cannabis legalization. Unfortunately, it probably won't get a chance to prove me wrong for several more years at best. During his campaign, President Trump was vague about his stance on the issue, but Attorney General Jeff Sessions was an outspoken opponent of marijuana legalization as a senator.
Sessions brought his opinion along with him to the Department of Justice. If anything, we can expect tougher enforcement of existing marijuana laws in the years ahead.
An uncooperative federal government, increasing losses, and heavy dilution of shareholder value are all generally good reasons to avoid any stock on their own. Combining all three is a recipe for disaster. This time it looks like the banks are right.