What happened
Shares of Sundial Growers (SNDL), Green Thumb Industries (GTBIF -1.37%), and Curaleaf (CURLF -2.69%) fell hard today, down 8%, 8.6%, and 7.6%, respectively, at the end of trading.
U.S. cannabis stocks Green Thumb and Curaleaf had actually rallied on Friday, believe it or not, but are reversing those gains today. That's because Senator Chuck Schumer attended a cannabis rally in New York on Friday, in which he hinted that a possible bipartisan legalization bill is still a possibility. Schumer has been working on a bill that could legalize marijuana at the federal level, and announced he had been in talks with six Senate Republicans on the issue.
However, with the market crashing today and selling off anything risky, these cannabis names gave back their Friday gains. Meme stock Sundial, a Canadian company with its own issues, is still well below Friday's levels.
So what
On Friday at the NYC Cannabis Parade & Rally, Schumer stated:
I have invited every U.S. senator -- every Democrat, every Republican -- to come meet with us and tell us why they won't support the bill or whether they will, and I'm making good progress... I've already met with six Republicans, so we can get 10 [and] we can get the 60 votes we need on the floor of the Senate to pass legislation that is so important.
Since hopes for a quick legalization were dashed last year, cannabis activists and investors have soured on the possibility for legalization and on the sector. That's especially true because Schumer is pushing for a full legalization, and not just a banking bill, as some others had hoped for. When Schumer advocated for going for full legalization, skeptics thought there was no way it would pass, considering a legalization bill would need to overcome a filibuster. But Schumer seems to think that might be a possibility.
However, U.S. cannabis companies like Green Thumb and Curaleaf probably won't make significant GAAP profits until something changes, and will continue to burn cash as they seek to grow.
Green Thumb is actually one of the more profitable U.S. cannabis companies, beating analyst expectations for both revenue growth and earnings per share last week on its first-quarter earnings release. Green Thumb posted 25% revenue growth, and even scored $29 million in real GAAP net income. However, because all U.S. companies are taxed on their gross margin, thanks to cannabis being illegal, it's hard for those profits to grow materially with revenue.
And since the industry is still expanding at a good clip, all leading U.S. cannabis companies have to invest in capital expenditures in excess of net income and/or acquire independent dispensaries, so most are cash flow negative. That also means they either have to raise money with beaten-down equity shares or raise high-yield debt.
Curaleaf actually reports its first-quarter earnings today. Curaleaf has gone for a more aggressive expansion posture than others, so it has still been showing net losses. It probably will be for some time, so it's riskier.
Meanwhile, Sundial is a small Canadian grower dealing with the difficult Canadian market, which is often over-supplied. Sundial became incredibly popular as a meme stock in the heyday of market speculation in early 2021. However, these types of profit-less stocks are now falling back to earth. Sundial only made $56 million in revenue over the past 12 months, despite having a market cap of $1 billion and an enterprise value of $600 million.
Image source: Getty Images.
Now what
I would stay away from Sundial, and it's really hard to own an unprofitable pot stock like Curaleaf in this environment. Green Thumb might be interesting, as it could rally hard should the macroeconomic picture change or Schumer's bill actually get passed. However, that would take time. With investors fleeing to safe havens for the immediate future, there three names are anything but.
