Penny stocks -- those trading under $5 per share -- are risky by their very nature. And that statement is arguably doubly true for cannabis stocks. Numerous pot companies, after all, have run afoul of regulators for questionable business practices in the past.
That being said, there are some potential diamonds in the rough bumping around the penny cannabis stock landscape right now. For example, Aleafia Health (ALEAF +0.00%) and MedMen Enterprises (MMNFF +0.00%) both sport intriguing risk-to-reward ratios, despite their exceptionally low prices per share.
Here's a brief overview of the potential risks and rewards associated with these two penny pot stocks.
Image Source: Getty Images.
A new top-10 Canadian cultivator
Canada's Aleafia isn't particularly well known among marijuana investors but that could soon change in the wake of the company's acquisition of health and wellness specialist Emblem last March. By acquiring Emblem, Aleafia instantly moved into the realm of top ten Canadian cannabis cultivators, with an estimated peak production capacity of 138,000 kg/year of cannabis. The combined entity also sports a whopping 40 health and wellness clinics spread across Canada. In a nutshell, Aleafia now has a decent shot at capturing a healthy portion of the multi-billion dollar medical marijuana market in the years to come.
Equally as critical, Aleafia has also been working toward expanding its footprint beyond Canada, evinced by its 10% stake in the Australian medical cannabis company CannaPacific and recent expansion of Emblem's joint venture with the German pharmaceutical wholesaler Acnos Pharma GmbH. The company thus has two international channels to soak up at least some of this increased production capacity.
The big drawback with this promising medical marijuana company is that it doesn't have a major partnering deal in place. As such, Aleafia is probably going to have to continue to rely on secondary offerings to fund its ongoing expansion for the foreseeable future, which is far from ideal given its sub-$1 share price at the moment.
Aleafia, in turn, might want to bite the bullet and execute a reverse split soon to boost its share price. Such a move would not only alleviate the pressure on its shares stemming from future capital raises, but it might also help to broaden the company's investor base.
All told, Aleafia's long-term capital needs may continue to weigh on its shares for the time being, whereby blunting the impact of these recent strategic business moves. Aleafia, as a result, will clearly require patience on the part of its shareholders in order to fully realize its enormous potential as a growth vehicle.
A premium dispensary play
California-based dispensary giant MedMen is another penny marijuana stock that has a favorable long-term outlook. The company is in the midst of executing an all-stock transaction for PharmaCann that will greatly increase its commercial footprint. MedMen's bread-and-butter is the state of California, where it operates 13 stores at the moment.
Once this PharmaCann transaction closes next year, however, the company will become the second-largest U.S. marijuana dispensary company, with a whopping 86 total retail licenses spread out across multiple states. Best of all, this game-changing transaction puts the retailer in prime position to continue growing in lockstep with the legal U.S. marijuana market as a whole -- a market that's forecast to reach a staggering $44.8 billion in annual sales by 2024.
MedMen, though, does have its fair share of problems, which is why its share price sits at a meager $2.12 today. Specifically, this iconic dispensary titan has been burning through both executives and cash at an alarming rate over the past year. Managerial instability and mounting losses are two key issues the company must tackle in order to boost its share price.
In all, MedMen seems destined to be acquired by an even larger fish, perhaps at a substantial premium to where the company's shares are trading at today. That said, a buyout probably won't occur until the U.S. ends federal prohibition on marijuana, and there's no telling when or if that seminal event will take place. So like Aleafia, investors shouldn't buy this high-risk, high-reward marijuana stock with the expectation of turning a quick profit. MedMen could take years to reach sustainable levels of profitability or to attract a worthwhile takeover bid.
