The S&P 500 recently hit a near-two-year low, and the Dow Jones has fallen into bear market territory. For savvy investors, buying stocks in this environment might not be such a bad move. There are plenty of beaten-down equities that look like excellent long-term options.
However, some companies face specific issues that are likely to persist even if marketwide troubles dissipate and are not worth buying right now. On that note, let's look at two companies, one in each category: SNDL (SNDL 1.95%), and Trulieve Cannabis (TCNNF 0.57%). These two marijuana companies have vastly different prospects.
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The stock to buy: Trulieve Cannabis
The entire cannabis industry has been struggling lately. With a suite of economic problems such as inflation, not to mention an ongoing global pandemic and geopolitical issues, investors have sought to avoid highly risky stocks that generate little profit. Most pot growers fit the bill, but Trulieve Cannabis, a vertically integrated company that operates in the U.S., stands out as one of the most disciplined.
Rather than fund pricey expansion efforts throughout the entire country by relying on dilutive forms of financing, Trulieve Cannabis started by focusing much of its efforts in just one state, Florida. Now the company operates in 11 states, although 120 of its market-leading 177 dispensaries are still in Florida.
Trulieve's financial results have been decent. During the second quarter, revenue increased by 49% year over year to $320.3 million, although that partly reflects the acquisition of Harvest & Recreation Health. Still, even before this acquisition closed in October 2021, Trulieve Cannabis's revenue was on a consistent upward trajectory.
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On the bottom line, Trulieve reported a net loss of $22.5 million in the quarter, compared to the net income of $40.9 million reported during the year-ago period.
Few cannabis companies have managed to turn meaningful, consistent profits, but Trulieve has been one of the most impressive in this regard, at least until its recent acquisition of Harvest. Trulieve Cannabis recorded 18 consecutive quarters of profitability through June 30.
While the company's recent net loss might be looked at as a step in the wrong direction, it's not rare to see businesses incur losses following a major acquisition.
OTC: TCNNF
Key Data Points
Much of the red ink on the company's bottom line during the second quarter was due to one-time charges. The adjusted net loss for the period, which eliminates one-time items related to its acquisition of Harvest, came in at a much better $1.1 million.
It's also worth noting that Trulieve Cannabis' margins have decreased in the past couple of years as its expenses have increased. That is partly a result of the company's expanding operations. It had only 52 dispensaries as of June 2020, less than a third of the number it has now.
The company has done so to cement its position as a major player in this increasingly competitive market, which seems to be working. Trulieve Cannabis remains a leader in states such as Florida, Arizona, West Virginia, and Pennsylvania. The company's management has focused on profitable growth in the past, and it plans to continue down that path.
In my opinion, investors should ignore the red ink on the bottom line for now. There will be plenty of opportunities for Trulieve to grow its revenue and become consistently profitable eventually. According to some estimates, the market will expand at a compound annual growth rate of 14.9% through 2030.
Trulieve Cannabis stands as one of the best picks to profit from this opportunity.
The stock to avoid: SNDL
SNDL, formerly known as Sundial Growers, rose to fame as part of a group of equities known as meme stocks. The company, which operates in Canada, is a producer and retailer of cannabis, and it owns liquor retail operations in the country, too. With its shares trading for just $2, SNDL might look cheap by virtue of its absolute price.
NASDAQ: SNDL
Key Data Points
That's could especially be the case as its revenue skyrocketed recently. During the second quarter, SNDL's top line came in at $223.7 million, compared to net revenue of just $9.2 million during the year-ago period. But that was due to acquisitions, most notably alcohol retailer Alcanna in March for about 320 million Canadian dollars ($233 million) in cash and stock.
There is nothing wrong with acquisitions. SNDL has diversified that way, adding a retail liquor business from which it now generates most of its sales. But the company does not have a good track record. For one, SNDL's revenue has generally been fairly inconsistent until its most recent acquisitions.
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That may be due to the competitive nature of the Canadian cannabis market. Legalization in the country attracted a substantial number of players. Also, the illicit market remains alive and well, despite legalization, and it is helping complicate things for SNDL and its peers. Further, SNDL has been consistently unprofitable, and there is no telling when it will start recording green on the bottom line consistently.
Data by YCharts.
Companies that aren't profitable can still be worth buying, provided their business is rapidly and organically growing, and they are building a competitive advantage of some sort. SNDL's struggles to do that while focusing on its marijuana operations may be why it largely turned away from cannabis through its recent acquisitions.
In that sense, SNDL's shift toward liquor retailing could be a great move. Here's why. Analysts continue to estimate that the cannabis market in North America (including Canada) has attractive long-term potential. SNDL's liquor retailing segment could help it weather the current storm and support its cannabis business while the industry matures, which could later leave SNDL in an enviable position down the road.
But the company hasn't shown an ability to report solid financial results regularly, and it is too soon to know whether the company will perform consistently better from here on out. Given SNDL's track record, it's best to watch how things unfold at arm's length, at least for now.
