Trulieve Cannabis Corp (TCNNF)

[FUNMAN]

Marijuana Stocks: Buy This, Not That
Popular pot stocks don't always make for the best investments.

By: Sean Williams
Jan 31, 2020 at 7:21AM

https://www.fool.com/investing/2020/01/31/marijuana-stocks-buy-this-not-that.aspx

It's been a wild past year for marijuana stocks, with the first quarter of 2019 turning in some of the most prolific gains we've seen over a three-month period, followed by perhaps the ugliest nine-month stretch in the relatively short history of the cannabis industry. There's no doubt that marijuana stocks have some maturing to do, but there's also no questioning the long-term opportunity present in the pot industry.

With valuations hitting, in some instances, one-year or two-year lows, bargain hunters and growth stock investors are out looking for intriguing deals. The good news is that there are marijuana stocks worth buying that have competitive edges over their competition. But on the other side of the aisle, there are possibly even more awful pot stocks (many of them popular among investors) that we should avoid.

If you have a desire to invest in certain aspects of the cannabis industry, consider this a version of "buy this, not that" for marijuana stocks.

Canadian marijuana growers

The most obvious way to invest in the cannabis industry would be to buy a licensed grower/retailer in Canada, the first industrialized country to give adult-use weed sales the green light in the modern era. But what you'll have to be careful of are the brand-name growers, which in many instances are bad news.

Don't buy: Canopy Growth (NYSE:CGC) and Aurora Cannabis (NYSE:ACB)

Canopy and Aurora are easily two of the most popular cannabis stocks in the industry and, at one point, were projected to be Numbers 2 and 1, respectively, in peak production and international presence. However, both have been losing an inordinate amount of money and likely won't be profitable until fiscal 2022 at the earliest. In fact, Canopy Growth's share-based compensation outpaced its net sales in its fiscal second quarter.

What's more, Canopy Growth and Aurora Cannabis have ugly balance sheets that are buried by goodwill. After the companies grossly overpaid for their acquisitions, 57% of Aurora's total assets and 23% of Canopy's are accounted for by goodwill. In other words, these are writedowns just waiting to happen.

To boot, Aurora Cannabis might be facing a cash crunch by midyear, while Canopy's industry-leading cash pile has been cut nearly in half since closing its equity investment from Constellation Brands in November 2018.

Buy this instead: OrganiGram Holdings (NASDAQ:OGI)

Comparatively, New Brunswick-based OrganiGram Holdings isn't as well known, but it's a remarkably better company. Operating from only one campus in Moncton, New Brunswick, OrganiGram has more ability to adjust its expenses and production to match Canadian demand than its peers. Not to mention, utilizing its three-tiered growing system should produce a yield per square foot that's well above the industry average.

If you need more evidence of OrganiGram's superiority, it's also the only Canadian grower that's generated an operating profit without the aid of fair-value adjustments or one-time benefits. This speaks to the company's ability to keep expenditures down as well as supports the importance of its production efficiency.

Also, despite having the geographic advantage of being located in an eastern Atlantic province and being able to cater to markets where marijuana adult-use rates are higher than the national average, OrganiGram is one of a small handful of growers with supply deals in every province. It's the preferred name to own in the Canadian cultivation space.

U.S. pot stocks

The United States is another no-brainer investment opportunity for marijuana stock investors, especially considering that it'll almost certainly lead the world in annual sales, at least according to various Wall Street estimates. But throwing a dart at just any multistate operator (MSO) might not be a great idea.

Don't buy: MedMen Enterprises (OTC:MMNFF)

Dispensary operator MedMen is very popular among U.S. pot stock investors, and its Southern California stores have had a knack for rivaling Apple stores in terms of sales per square foot. Unfortunately, MedMen's visions of grandeur have led it to overspend, with the company posting an abysmal $231.7 million operating loss in fiscal 2019.

But that's not the worst of it. MedMen looks to be facing a serious cash crunch, with its management team recently confirming that it's paying some of its vendors with common stock in an effort to conserve cash. Although MedMen had worked out up to $280 million in financing with private equity firm Gotham Green Partners, the company informed investors in December that it no longer has access to $115 million of this cash.

This is also a company that called off its all-stock acquisition of privately held MSO PharmaCann in October, likely due to cash concerns. MedMen is in dire straits, and it's perhaps the top marijuana stock to avoid.

Buy this instead: Trulieve Cannabis (OTC:TCNNF) and Planet 13 Holdings (OTC:PLNHF)

Instead of tossing your hard-earned money down the drain on MedMen, buy a lesser-known but unique MSO like Trulieve Cannabis or Planet 13 Holdings. Trulieve and Planet 13 are all about being laser-focused on their home states, which is what's liable to make all the difference.

Trulieve Cannabis has a majority of the medical marijuana market share in Florida. It has opened 40 stores in the Sunshine State, and no pure-play marijuana stock in North America is currently generating more in net income without the aid of one-time benefits or fair-value adjustments. Not to mention, keeping its expenses close to the vest has allowed Trulieve to effectively build up its brand.

Meanwhile, Planet 13's Superstore in Las Vegas, Nevada, is all about a unique consumer experience. The company's store spans 112,000 square feet, features plenty of technology and consumer-engaging aspects, and has seen foot traffic and average ticket sales climb steadily since opening its doors in November 2018. This year should see Planet 13 make the push toward recurring profitability.