As a whole, the cannabis industry is growing by leaps and bounds, but you wouldn't know it by looking at the ETFMG Alternative Harvest ETF ( MJ -3.25% ). Over the past six months, shares of this exchange-traded fund have tumbled 40%, and the losses are accelerating.
In a nutshell, investors are hungry for positive cash flows but there just aren't enough cannabis sales for half of the industry's members to meet lofty expectations. Another round of earnings reports dripping with red ink could be right around the corner.
|Company||Annualized Operating Profit (Loss)||Recent Cash Balance|
|Trulieve ( TCNNF 1.03% )||$83.6 million||$54.0 million|
|Village Farms ( VFF -2.68% )||$37.2 million||$11.7 million|
|Innovative Industrial Properties ( IIPR -1.31% )||$16.4 million||$196.2 million|
These relatively well-run companies have the right combination of earnings and cash to get through a prolonged bear market for cannabis stocks in general. Here's why you want to keep your eyes on these three.
1. Trulieve: Flower power
There are 12 operators in Florida with open medical marijuana dispensaries, but it seems like Trulieve was the only one truly ready for the beginning of smokable flower sales this March. That allowed the company to produce the industry's largest adjusted operating profit during the three months ended June.
During the week ended Sept. 26, Trulieve ran 35 dispensaries in Florida. That's just two more dispensaries the next runner-up Surterra and nine more than third-place Curaleaf ( CURLF -0.65% ).
Over the past six months, though, investors have learned the hard way that opening attractive dispensaries is a lot easier than keeping them stocked with products that bring customers back again and again. Trulieve sells a majority of the THC dispensed in Florida, and it's not just because it has the most dispensaries.
During the week ended Sept. 26, Trulieve's dispensaries sold medical marijuana containing 38,600 grams of THC, which works out to an impressive 1,100 grams per dispensary. The same week, Curaleaf sold just 366 grams per dispensary and Surterra reported a dismal 272 grams of THC per location.
Trulieve finished June with plenty of cash on its balance sheet, and operations producing significant profits. If the company's poorly performing peers in Florida can't depend on the equity tap, Trulieve will get a chance to use its growing cash pile to buy up their assets at firesale prices.
2. Village Farms: What successful execution looks like
Village Farms recently began trading on a major exchange, but it's been earning a living with greenhouse-grown agricultural commodities longer than any company in North America. Tomatoes and cucumbers are extremely low-margin products, and none of the revenue they generate reaches the bottom line unless the company selling them manages costs more carefully than its peers.
Emerald Health ( EMHT.F -5.17% ) and Village Farms formed a joint venture a couple of years ago called Pure Sunfarms to sell greenhouse-grown cannabis in Canada. In the three months ended June, Pure Sunfarms sold around 8,000 kilograms of cannabis, which was 122% more than the joint venture recorded during the first three months of the year.
Village's production skills have transferred to growing marijuana even better than expected. Pure Sunfarms reported an all-in cost of just $0.49 per gram, which is lower than any of its Canadian peers. In April, the venture's 1.03-million-square-foot facility became the largest site in Canada to reach full production mode, and the addition of a nearby sister site should double production capacity and lower that all-in cost a bit further.
Village Farms doesn't have a whole lot of cash handy, but the company probably won't need to break any piggy banks soon. Profits from Pure Sunfarms already more than offset recent losses related to Village Farms' produce operation.
3. Innovative Industrial Properties: Steady in almost any storm
Innovative Industrial Properties is a real estate investment trust (REIT), which means it has to send nearly all the profits it creates to shareholders. In September, Innovative Industrial Properties announced its third-quarter dividend would be 30% higher than the previous quarter and 123% more than the previous-year period.
At recent prices, IIP shares offer a nice 3.2% dividend yield that could keep soaring even if the market for cannabis stocks suffers a long downturn. That's because this REIT owns a growing portfolio of cannabis facilities across the U.S. and all of them are occupied with tenants that sign 15-year leases that include scheduled rent increases.
IIP's cash flows should be the industry's steadiest because it only needs its tenants to keep paying their rent month after month. It's important to realize that IIP isn't investing in real estate it develops and then rents out to cannabis businesses. IIP's leases are really more like high-interest loans secured by the borrower's new facility. If a handful of big tenants go belly up faster than IIP can find new ones, buying the stock now could lead to heavy losses.
Prepare for a low-margin environment
Profit margins related to cannabis products are better than cucumbers, but they're not amazing. If the market sours on today's overextended cannabis giants, it's just a matter of time before businesses borrowing at double digits to build new facilities they can't afford to begin selling those facilities at knockdown prices to careful opportunists like Village Farms and Trulieve.