Trulieve Cannabis (TCNNF -8.79%) 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.
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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."
