The marijuana industry has been kicking "bud" and
taking names since the year began. Through April 23, the
broad-based S&P 500 was up 17% year to date,
representing one of its strongest starts to a year in decades.
Comparatively, though, the Horizons Marijuana Life Sciences
ETF, the first cannabis exchange-traded fund, had gained
45%, leaving the broader market to breathe in its secondhand
Investors are clearly enamored with the prospects
of recreational legalization throughout North America. Canada
became the first industrialized country in the world to green-light
adult-use cannabis in October 2018, and momentum appears to be
building in the United States to reform existing federal weed laws,
which still hold cannabis to be a wholly illicit drug that's prone
to abuse and has no recognized medical benefits. This call for
reform is made even stronger with two-thirds of all states having
legalized medical pot in some capacity, and two-thirds of all
Americans in favor of broad-based legalization, per Gallup.
But make no mistake about it -- growing momentum
does not make every marijuana stock a buy. In fact, it makes
unproven penny stocks potentially all the more dangerous.
Image source: Getty Images.
One such marijuana penny stock that looks to have
its act together on the surface, but is actually bad news once you
do some digging, is Medical
Marijuana (NASDAQOTH: MJNA), the
first-ever cannabis stock to list its common stock for trade in the
United States -- albeit on the over-the-counter exchange. Although
trading at only $0.06 per share, it's more than 3.5 billion
outstanding shares yields a somewhat respectable $219 million
Nearly two weeks ago, Medical Marijuana released
its fourth-quarter and full-year results, painting a picture of
solid progress as a producer and distributor of
cannabidiol (CBD) and hemp-based oil products. CBD is the
nonpsychoactive cannabinoid best known for its perceived medical
benefits. Contained within its report were numerous
For instance, the company recognized sequential
quarterly sales growth throughout the year, and ultimately came
within a stone's throw of registering $60 million in annual
revenue. Removing cost of goods sold, Medical Marijuana recorded a
gross profit of $40.34 million.
Aside from organic growth opportunities, Medical
Marijuana also stands to benefit from the December passage of the Farm
Bill. Signed into law by President Trump, the Farm Bill
legalizes the commercial production of hemp and hemp-based
derivatives. Since hemp is a relatively cheap and abundant source
of CBD, this law plays right into Medical Marijuana's long-term
goal of growing its Kannaway and HempMeds distribution
Among CBD manufacturers, it's also done a pretty
impressive job of pushing into foreign markets. HempMeds, which
supplies hemp oil products, has a presence in Mexico and Brazil,
while Kannaway is currently focused on the U.S. and European Union,
with eyes on Canada and Mexico in the near term.
Yet, for every achievement listed, there's a
valid reason Medical Marijuana's stock has tumbled 19% since the year
began, while practically every other pot stock has risen.
To begin with, the company isn't making money an
operating basis, despite rapid sales growth. Even with a 67.4%
gross margin, total expenses soared to $48.36 million, leading to
an operating loss of just over $8 million. For what it's worth,
HempMeds came very close to being profitable on an operating basis,
but it only represents a little more than 10% of total sales. Costs
rising at the same pace as sales, or even faster, has been a
constant theme for Medical Marijuana since its founding.
Secondly, after briefly panning out, the
company's investments have proven to be a major drag on its bottom
line over the past two years. At the end of 2018, Medical Marijuana
held an approximate 38% equity stake in microcap Axim
Biotechnologies, a cannabinoid-based drug and
drug-products developer. Shortly after Medical Marijuana's initial
investment, Axim's stock soared from around $0.25 to north of $20
per share, substantially inflating Medical Marijuana's total
assets. But Axim has given back almost all
of its gains since peaking in early 2017, with its shares
closing at $1.62 last Tuesday. This resulted in Medical Marijuana
taking a nearly $190 million adjustment on its investments in 2018,
pushing its annual loss to $202.6 million. Yuck!
Third, the company's balance sheet is hiding a
pretty ugly secret. And I say "secret," because most investors
don't really give balance sheets the once over they really deserve.
Of the $92.96 million in total assets Medical Marijuana ended 2018
with, $45.37 million of it was goodwill, with another $25 million
being investments (i.e., mostly Axim). Put in another context, 76%
of Medical Marijuana's equity is built on hope. The hope that it'll
recoup the premium it paid for acquisitions, and the hope that
Axim's stock doesn't implode any further. Last I checked, "hope"
isn't a valid investment thesis.
Last, but not last, this is a company that has a
long history of financing its business by selling common stock and
convertible debentures (which can be eventually turned into
common stock), thereby diluting the value of the existing shares.
Having ended the year with only $4.29 million in cash, but losing
$8 million on an operating basis, additional common stock sales are
to be expected.
Penny stocks in a fast-growing industry might be
alluring, but trust me, you don't want to take the bait.
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Sean Williams has no
position in any of the stocks mentioned. The Motley Fool has no
position in any of the stocks mentioned. The Motley Fool has a