A lack of profitability is what makes investing in cannabis very risky. That's why selecting stocks that have been profitable recently is a good way for investors to minimize their overall risk exposure in the industry. A cannabis company that's able to hit breakeven is already several steps ahead of many of its peers.
But cannabis companies can actually achieve profitability in ways unlike businesses in other industries, like fair-value adjustments. Below are three companies that are capable of posting profits and could be good buys today.
1. Village Farms
Village Farms International (VFF 13.11%) is coming off a third-quarter performance in which it posted a loss of $5 million, but that hasn't been the norm for the company. In three of its past four earnings reports, Village Farms finished in the black. However, the company's operating income has consistently been in the negative, as its 100%-owned operations haven't been profitable, generating an operating loss of at least $2 million in each of the past four quarters.
The company's 50%-owned joint venture in Pure Sunfarms has helped Village Farms post a profit in recent quarters. In Q2, Pure Sunfarms added $13.9 million in income for the company. Unfortunately, in Q3, Village Farms didn't receive the same benefit, as Pure Sunfarms recorded a loss during the period, largely due to fair-value losses that weighed down the joint venture's overall results and put it in a negative position. However, if Pure Sunfarms is able to avoid such sizable adjustments in the future, it should be a safe bet to continue to add to Village Farms' earnings and help the company return to profitability.
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2. Charlotte's Web
Charlotte's Web (CWBHF +0.00%) is an exception among profitable cannabis stocks in that the company is able to post a profit without relying on other income or gains from nonoperating results. Although this past quarter was a disappointment for Charlotte's Web, with the cannabidiol (CBD) company posting an operating loss, that hasn't been the norm. In each of the three prior periods, the company not only posted a positive net income, but its operating income was in the black as well -- hitting $6.9 million over the trailing twelve months.
Currently, 9,000 locations around the country carry Charlotte's Web products, and they are available in more than 40 states. Getting involved in CBD pet products and a new line of gummy products will help the company continue to grow its sales in future periods as well. The big challenge for Charlotte's Web will be controlling costs amid all this growth.
In its most recent quarter, operating expenses doubled from the prior-year quarter despite its top-line increasing by just 42%. However, the company underwent a relocation during the period, and it may be a bit early for investors to be pushing the panic button.
3. Aphria
One company that doesn't have to worry about returning to profitability is Aphria (APHA +0.00%). The company posted a profit for a second consecutive period, and it's the third time in the last four quarters that Aphria finished in the black. What's encouraging is that unlike in prior periods, the company also posted a positive operating income number.
Unfortunately, that comes with a bit of a caveat. During the quarter, Aphria benefited from fair-value adjustments of 18 million Canadian dollars that boosted its gross profit to CA$45 million, and that was enough to absorb operating expenses of CA$41 million.
The danger for investors is that nonoperating items, including fair-value gains and losses, have been behind Aphria's positive earnings results, and that makes future profitability a big question mark. If the company doesn't benefit from fair-value gains or nonoperating income providing it with a big boost in future quarters, there's a very real possibility that Aphria could end up back in the red. That's why although the recent results might appear strong, there's little reason for investors to expect them to remain that way.
Are these stocks good buys today?
Of the three marijuana stocks listed above, Aphria looks to be the riskiest due to the noise on its financials and the potential for the company to record a loss in future quarters. Village Farms is a better buy and could be due for an improved quarter, but it too is facing uncertainty surrounding gains and losses.
That leaves Charlotte's Web as the best buy of the three since its exposure to these fluctuating gains and losses appears to be the most minimal. It too is facing some challenges in relation to rising costs, but the good news is that those are more controllable than revaluation gains and losses. And that's why it might be one of the better buys in the cannabis industry today.
