There are consistently profitable industries all over this economy; it's just too bad marijuana isn't one of them. Yet there are signs -- small ones -- that this could be changing.
In this video from Motley Fool Live, healthcare and cannabis bureau chief Corinne Cardina and veteran Motley Fool contributor Eric Volkman discuss the prospects for this, zeroing in briefly on Hexo (HEXO). This clip was recorded on Dec. 22, 2020.
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Corinne Cardina: Let's pivot to talk about profitability. So, obviously, profitability has been a big struggle for Cannabis stocks over the years. How does 2021 look? Are there any pot stocks right on the cusp of profitability and bringing in meaningful cash flow that you have noticed?
Eric Volkman: I wouldn't put a lot of money on companies making money.
There's still too many challenges to the industry. They really have to face a lot of headwinds and they're still a young growing industry. There's that supply problem, the oversupply that's pushing prices down. You still have plenty of black market competition. You have that because states can get greedy and they get thoughtless and it can sometimes [cost] considerably more money to go and buy a legitimate licensed marijuana product than it would be just from the guy around the alley.
I gave the example in a previous talk that we had -- in California here, it's possible to buy certain strains of dried flower and pay something like 40% above that in taxes. That's a pretty big hit. That matters. Anybody who is reasonably cost-conscious is at least going to have second thoughts about that like, "Well, my brother-in-law sells weed. He's a little bit of a wildcard, he never picks up his phone... but it's a lot cheaper."
So that's still going to be a challenge. The good thing is marijuana companies have realized that they need to pull back. In years previously, they were going for scale. They were new, they had fresh investments, they had lots of investor interest, they had lots of money coming in. They would go on buying sprees, like this farm or this production facility, or this old shuttered retail store to turn it into something.
They spent a lot of money and quite honestly, they were careless about it. They would pay well above any kind of proper market value. You had a lot of companies with a lot of goodwill on their books and they're still working through that. That's why quite a few over the course of this year posted significant losses -- because they had these goodwill impairments that they had to take so much. They paid ridiculous amounts of money for some of the assets that they bought.
I don't see that being a problem going forward. I think they've gotten smarter. I think they've gotten thriftier. I think they've gotten wiser about how they spend their money. They're more careful, and they are not as acquisitive as they used to be. So I see some hope.
One example I had down here is Hexo, which is a Canadian producer, one of the smaller ones, but it has its fans. They had a pretty ugly 2020, let's be honest, but they are getting better. They reduced their loss to the single-digit millions of dollars -- I think it's something like $2.6 million -- and the previous quarters it was much higher. Again, a lot of that had to do with impairments, asset writedowns, and stuff like that.
So I feel overall the trend is going in a positive direction. Does this mean that marijuana companies will become habitually profitable? Honestly, I doubt it. But at least they're getting smarter, and at least they're starting to stem their losses.
