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1 Marijuana Stock to Avoid at All Costs

By David Jagielski – May 20, 2020 at 6:29AM

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This stock's just too risky a buy.

Marijuana stocks have been far from the safest investments to hold over the past year. The Horizons Marijuana Life Sciences Index ETF (HMLSF 2.20%) has tanked by more than 70% over the past 12 months, and some cannabis stocks have done even worse. One of those companies is Harvest Health & Recreation (HRVSF). It's crashed by 81% during the same period, and unfortunately, there's little reason for investors to expect things to get much better in 2020. Here's why you should avoid this stock.

The company is growing -- but so are its losses

Harvest Health released its year-end earnings results on April 24. Revenue during the fourth quarter reached $37.8 million, which is more than double the $16.9 million that the vertically integrated cannabis company brought in during the same period last year. But the problem for the Arizona-based company is that its losses continue to spiral; in Q4, they totaled $89.5 million, and that was an increase from $71.5 million in the prior-year period. For the full year, the results are even worse: a loss of $175.6 million in 2019, which is more than double the $68.1 million loss that Harvest Health incurred in the previous year.

Cannabis greenhouse.

Image source: Getty Images.

For investors, reading the company's financials is an exercise of its own. They're littered with fair value adjustments, gains and losses, and impairment costs, so trying to decipher whether Harvest Health has made progress is no easy task. That's a problem for investors because it means that future earnings reports can be a coin toss. Adjustments could make an unprofitable period profitable, while impairment charges could send strong financials into the red. So even if you were bullish that Harvest Health could turn things around, many other items not related to its core operations could negatively impact the company's ability to break even.

But many marijuana companies are struggling to stay out of the red. What makes Harvest Health even riskier is its dangerous cash position.

Harvest Health could be in danger of running out of money

As of Dec. 31, Harvest Health had $22.7 million in cash on hand. That's nearly $170 million less than a year earlier, when it had access to $191.9 million. And that $22 million might not last the company very long given that during 2019, Harvest Health used up $99.6 million just during the course of its day-to-day operating activities. That likely means the company will issue more shares this year to help keep its operations running, and that'll result in more dilution for existing shareholders and a lower stock price in the process.

But you don't need to look at the company's financials to see that things aren't going well at Harvest Health. In March, investors learned that the company would no longer be acquiring Verano Holdings for $850 million. Harvest Health CEO Steve White said, "Given the persistent challenges in consummating this deal and current market conditions, both companies felt it was prudent to move forward separately at this time."

And then on April 28, the company also announced it was divesting from assets it owned in California, the largest market for pot in the entire world. Harvest Health said it was selling 13 dispensaries, both planned and currently operating, to High Times for a combination of $5 million cash, a $7.5 million promissory note, and shares. While the move clearly undercuts an attractive growth opportunity for Harvest Health, the CEO tried to emphasize the positives, stating that the company was "optimizing operations and expanding assets" in its other markets. But what this says to investors is that the company is undergoing some changes in its growth strategy, and they aren't positive ones when you're reducing assets, especially in a market like California.

Stay far away from Harvest Health

A stock that's lost more than 80% of its value in one year has many problems, and that's clearly the case with Harvest Health. This year is going to be a challenging one for the cannabis industry; COVID-19 is likely to have a negative impact on consumer spending, and that means achieving sales growth this year will be difficult. Add to that concerns about cash flow, and it's not hard to imagine a scenario in which Harvest Health's stock plummets even further in 2020. Harvest Health is one of the riskiest stocks to hold in an already very risky industry. Unless there's a significant improvement in the company's operations, Harvest Health is not a stock that investors should consider buying shares of today.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Harvest Health & Recreation Inc. Stock Quote
Harvest Health & Recreation Inc.
HRVSF
Horizons Marijuana Life ETF Stock Quote
Horizons Marijuana Life ETF
HMLSF
$4.60 (2.20%) $0.10

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