Please ensure Javascript is enabled for purposes of website accessibility

How Risky an Investment Is Trulieve Cannabis?

By David Jagielski - Updated Jan 27, 2020 at 12:25PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A short-seller's report last month sent its stock price into a tailspin, but how worried should investors really be?

Trulieve Cannabis (TCNNF 4.21%) has generally been one of the safer cannabis producers in the industry to invest in. Strong sales coupled with consistent profits in each of its past four quarters have helped the company stand out from its marijuana industry peers.  However, when a short-seller report came out last month that underlined some concerns about the company and its connections, it put Trulieve in the spotlight for all the wrong reasons. And although that report may be biased and contain inaccuracies, there are concerns that investors should have about buying the company's stock today.

Profitable, but not immune to cash flow issues

Cash is a sensitive topic in the cannabis industry these days. Many pot producers are burning through money and don't have much on their books. Trulieve, unfortunately, is no exception. Although the company is profitable, its free cash flow for the past 12 months was negative $49 million.

Meanwhile, the company had just $31 million in cash on hand, though it lists $100.8 million on a proforma basis as of Nov. 15, 2019, based on recently completed debt financing. This cushion may not last long given that in its most recent quarter its free cash flow was negative $25 million. The company notes, however, that its planned capital expenditures are "fully funded from the two sale-leasebacks completed in 2019 along with the two debt offerings." 

The company could take on more debt or issue more shares to generate operating capital, but these tactics can't be used over the long term as too much share dilution could send the stock into a tailspin. And with Trulieve expanding into new markets in California, Connecticut, and Massachusetts, its need for cash will only be increasing, making it even more important that it doesn't burn through too much money in its day-to-day operations.

Trimming weeds.

Image source: Getty Images.

Negative press could weigh on the stock

On the December day that investors learned of the short-seller's report, Trulieve's share price plummeted more than 20%.  That plunge underlines just how vulnerable the stock can be to bad news or simply to negative press. As well as Trulieve shares may be performing at any point, there's always the possibility that a big correction could be around the corner -- a volatility common to pot stocks in general.

The danger for investors is how sudden and drastic such share price moves can be. It's a reminder that although the company's financial results may be stronger than those of many of its peers, that doesn't mean that investors will be any slower to hit the sell button on it at the first insinuations of problems, even if they're unfounded.

The other challenge is that it's not only company-specific news that can weigh on Trulieve, but industry-related developments as well. News of state bills and ballot measures to legalize pot can send those stocks soaring, while warnings from the Food and Drug Administration tend to have the opposite effect.

What does this mean for investors?

Trulieve may be among the leaders in the rising U.S. cannabis market, but that doesn't mean that it's not a risky investment.

One of the biggest reasons that pot stocks performed so poorly in 2019 is that their valuations were too high when it began. The good news for Trulieve shareholders is that with a $1.2 billion market cap and the $209 million it has generated in revenue over the past four quarters, its price-to-sales multiple works out to a modest 5.7 or so. Compare that to rival Acreage Holdings, which trades at more than 9 times its revenue.

Bad press can sink any stock in any industry, and that's always going to be a risk for investors. What makes Trulieve a little riskier is that its dwindling cash cushion may lead to stock dilution and lower share prices. Unlike marijuana stocks such as Canopy Growth that have partners in other industries that can help them out, Trulieve is on its own.

While the situation may change if Trulieve continues burning through cash, it's not a problem that investors need to worry about just yet. For now, it's still a fairly low-risk stock given the industry it's in.

Editor's note: This article has been updated to note that the company lists $100.8 million cash on a proforma basis as of Nov. 15, 2019, and says its planned capital expenditures are "fully funded from the two sale-leasebacks completed in 2019 along with the two debt offerings."

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Trulieve Cannabis Stock Quote
Trulieve Cannabis
TCNNF
$14.71 (4.21%) $0.59
Canopy Growth Stock Quote
Canopy Growth
CGC
$5.42 (7.85%) $0.40
Acreage Holdings, Inc. Stock Quote
Acreage Holdings, Inc.
ACRGF

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
332%
 
S&P 500 Returns
118%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.