After months of sizzling gains, marijuana stocks cooled off in a big way in May. The Horizons Marijuana Life Sciences ETF, the first tradable cannabis ETF, which holds more than four dozen pot stocks of various weightings, fell by more than 13% last month after having tripled the S&P 500's return through the first four months of the year.
For some investors, this decline could be a perfect opportunity to go shopping. After all, the global pot industry is expected to see sales grow fourfold to sixfold between 2018 and 2029/2030, according to various Wall Street estimates. However, this doesn't mean the entire gamut of pot stocks is worth buying.
After perusing the nearly five dozen marijuana stocks I follow on a regular basis, I believe three should be avoided like the plague in the month of June.
Repeat after me: "Production isn't everything." Once more for those people in the back, "Production isn't everything!"
There's no denying that Aurora Cannabis (NYSE:ACB) looks to be the clear cannabis production leader in Canada. It's already on pace for more than 150,000 kilograms on an annual run-rate basis, and projects for at least 625,000 kilos of yearly run-rate output by the midpoint of 2020, assuming its Aurora Sun, Exeter, and Aurora Nordic 2 grow farms receive cultivation licenses.
It's also a company that's done a bang-up job of pushing into foreign markets, with a production and/or distribution presence in 24 countries worldwide, including Canada. These external sales channels will really begin to come into play a few years from now when dried flower oversupply becomes a problem in Canada, as it's done in so many of the recreationally legal U.S. states.
But what Aurora Cannabis hasn't done is demonstrate that it can develop its own cannabis brands without acquiring them, or develop a line of derivative products without a brand-name partner. Aurora Cannabis has made 15 acquisitions since August 2016, and many of these buyouts have made it into the perceived-to-be dominant pot stock it is today. But these buyouts are mostly shortcuts that mask the fact that we've yet to see the company do much organically. Acquisitive growth, just like cost-cutting, can only take a company so far.
To boot, Aurora has yet to demonstrate that it's going to be profitable on a recurring basis anytime soon. Yes, management expects recurring EBITDA to become positive in the fiscal fourth quarter (April-June 2019), but positive EBITDA doesn't mean profitability. In fact, what had looked like healthy profits of around 100 million Canadian dollars (CA$0.10 per share) in fiscal 2020 have evaporated, with the consensus Wall Street estimate now calling for nil (CA$0.00) in fiscal 2020.
And, as always, there's the incessant share-based dilution. This dilution has caused Aurora's market cap to nearly triple since the beginning of 2018, but shareholders actually lost money over this time period. It's unclear when Aurora is going to put its shareholders first, which is all the more reason to keep your distance from Canada's top producer in June.
In April, shortly after upscale vertically integrated multistate dispensary operator MedMen Enterprises (NASDAQOTH:MMNFF) released its preliminary third-quarter operating results, I opined that its official earnings release would be a "real stinker"...and wow, was that call correct.
Although MedMen, like most U.S. dispensary operators, is seeing a steady rise in revenue, the first clue that things wouldn't be that great came from its breakdown of growth by state. Specifically, MedMen's California locations, which could easily be considered its bread and butter since they generated about two-thirds of its sales in the fiscal third quarter, grew sequential quarterly sales by a mere 5% in Q3. Yes, California has had supply chain issues of its own, but this was unexpectedly slow growth in a state that's expected to surpass Canada in terms of total annual marijuana revenue.
For the quarter, MedMen wound up reporting a relatively unimpressive gross margin before fair-value adjustments of 42%, to go along with a net operating loss of $53.3 million. Total expenses more than tripled year over year to $73 million, with operating losses for the first nine months of fiscal 2019 hitting $178.4 million. Despite reducing selling, general, and administrative expenses by 9% from the sequential second quarter, MedMen still lost $63.1 million (net) in Q3, or $0.20 per share.
While there are aspects of MedMen's business to like, such as the fact that its sales per square foot in California have rivaled that of Apple stores, it's really hard to be impressed when the company's bottom line isn't improving. This loss becomes even more glaring when you realize that dispensary stocks Trulieve Cannabis and Harvest Health & Recreation have both been profitable on an operating basis.
In terms of its bottom line, MedMen is bringing up the caboose among vertically integrated dispensary operators, and investors should probably leave it alone until it claws its way out of last place.
Lastly, ambitious pot stock investors should avoid thinking that the recent dip in Tilray (NASDAQ:TLRY) stock is a buying opportunity. With earnings results actually bearing weight now, a thorough look at Tilray's first-quarter operating results should have (and has had) most investors heading for the exit.
When Tilray went public in July 2018, it looked to be the face of the cannabis industry. It had a clearly defined plan to expand internationally, with ample cultivation capacity of 3.6 million square feet noted in its June prospectus prior to going public. The company was also well-known within Canada's medical marijuana community, and had a major shareholder in private-equity firm Privateer Holdings, which owns close to 80% to all outstanding shares.
However, the Tilray investors know today looks very little like the Tilray of July 2018. CEO Brendan Kennedy announced in March that the company would look for opportunities to invest outside of Canada, with a move into the U.S. via hemp, and into Europe's medical cannabis industry, taking priority. This put the company's Canadian expansion plans in limbo, and it substantially clouded the company's strategy.
As its first-quarter results showed, Tilray is sort of adrift without a paddle. Gross margin remained anemic at 23% while operating losses catapulted to $27.9 million from $3.7 million in the year-ago period. As a whole, this meant Tilray lost $0.32 per share in the first quarter, pretty much ruling out any chance of profitability in 2019, and possibly even 2020.
The company is also carrying around a substantial amount of goodwill and intangible assets, all while its existing cash pile dwindles via investments and operating losses. If Tilray had a clear game plan, it wouldn't be a buy, but it also wouldn't be a stock to avoid in June. But as a rudderless ship with more questions than answers for the time being, it looks safest to keep this highly volatile pot grower out of your portfolio.