Analyzing all the new companies in the recently legalized cannabis industry is no easy matter. The reason is that there is no track record – everything is new. The industry & companies are new, management is new, all the employees, everything they do and how they do it is new. These companies are pioneers – there is no road in front of them to follow. They must blaze their own trails. For equity analysts that are used to evaluating long-established companies with familiar patterns, anything goes – it’s the wild, wild west.
It is typical for new companies to spend more money than they make – usually a lot more. Making a profit can take years of spending to increase sales until the company makes more than they spent to start the company in the first place. Investors should wait for a steady increase in sales at the least. But waiting until any company makes a profit is a safer strategy.
Cannabis Stocks: Finding Diamonds Amongst the Rubble
The best way to analyze early-stage companies is to follow the money. How much is the company spending? Are sales increasing at a pace to justify such expenditures? The most important goal for new companies is to get money coming in as soon as possible, they must learn how to increase sales. Then, hopefully, they will have established people and processes that will consistently bring in more sales greater than what they spend to get those sales. If they are not able to do that, their odds of survival are zero. Every company must make a profit eventually.
This analysis is based on the idea that until a company is profitable, it’s not profitable – and we don’t know with certainty it ever will be. Once a company proves that growing sales are consistently greater than expenses, only then will it be removed from our “Worst Cannabis Companies” list. Any of these companies could end up being highly profitable at some point, but until they do, all we know for sure is they are hemorrhaging cash.
The following companies are steadily spending more and racking up greater losses each year.
Harvest Health & Recreation
Harvest Health (OTCQX: HRVSF) (CSE: HARV) has 1700 employees and is based in Tempe, Arizona. They are a Multi-State Operator (MSO) serving 9 states to date. They have announced several acquisitions that account for part of their high expenses. This may prove to be money well-spent later; however, integrating recently acquired companies into one company at the same time can come with a host of unforeseen problems.
Sales for Harvest Health were almost non-existent until late 2018, but in the last 12 months, sales have quickly grown to over $66 million. Unfortunately, sales haven’t come close to covering expenses ($68 million in 2018 and $88 million over the last 12 months). The stock price has reacted accordingly: down 80%, now trading at $2.30. Still, if Harvest Health continues to grow at the present rate and expenses can be cut, Harvest Health could be very profitable within a few years.
Plus Products, Inc.
Plus Products (OTCQX: PLPRF) (CSE: PLUS) serves the California market with medical and recreational products. There is a discrepancy about where its headquarters are located. Its profile on Yahoo Finance says they are based in Vancouver, Canada, but their website says they are based out of San Mateo, California. It has a market cap of just $35 million.
Everything about this company says: small. After two years of operations, the company has only achieved sales of $13 million in 2018. Expenses, on the other hand, were $23 million. I have more confidence in companies with larger market capitalization, more employees, a larger market, and larger expenditures. Companies doing this imply they will be better able to capitalize on the growing market in the future.
Apparently other investors have a similar opinion: the stock has fallen 90% from $6 to $0.67.
AYR Strategies, Inc.
Ayr Strategies (OTCQX: AYRSF) (CSE: AYR.A) is a multi-state operator (MSO) based out of New York. Their initial cannabis markets are Massachusetts and Nevada.
Ayr has had limited sales so far. According to Yahoo Finance, sales in the past 12 months were just $1.2 million, but expenses were $98 million. That’s a huge expenditure without much to show for it. Depending on how they spent those funds, they may be well-positioned for future sales – maybe. But until they ramp up sales, investors should remain skeptical.
Anything can happen as the cannabis industry matures. As it does, keep an eye on sales and profits to spot the emerging winners.
Disclosure: The author, nor Matt Rego or Spotlight Growth have any position or relationship with any of the companies mentioned in this article. This article should not be taken as a solicitation to buy or sell any securities. Please conduct your own research and consult your financial advisor to determine your risk tolerance and investment path. We are not licensed brokers or investment advisors.
Article By: Gregg Killpack