Cannabis companies laying off workers and exiting key markets
Pot stocks are cheap, but have they become too risky to buy?
The cannabis industry is in free fall. Companies are struggling to find ways to grow, losses continue to pile up, and cash burn remains a big problem. For some businesses, that means it will take more than just layoffs to get things under control. Some large multi-state operators (MSOs) have been going to significant lengths this year and are planning to exit key markets.
Trulieve to exit Massachusetts
Trulieve Cannabis (TCNNF) is one of the larger, more notable MSOs in the industry. For a while, the big knock on the business was it was too focused on the Florida market, where it has more than 100 dispensaries. It has expanded into other states since then, and one of the areas it was targeting as a key growth opportunity was the northeastern U.S.
But on June 1 the company said that it would be taking "additional measures to preserve cash and improve financial performance," which include ceasing operations in Massachusetts by the end of this year. The company also says that it will be exiting Nevada's wholesale market and getting rid of some retail outlets in California.
A month earlier, the company reported its latest earnings numbers and said that as of the end of May, its cash balance stood at $195 million. That's down from roughly $219 million at the end of 2022.
Curaleaf plans to exit multiple states
Another big MSO, Curaleaf Holdings (CURLF -1.37%), previously said it would be winding down the majority of its operations in California, Colorado, and Oregon. In addition to Massachusetts, these are some of the nation's top marijuana markets, and all of them have legalized adult-use cannabis.
Unfortunately, with competition fierce in some of these markets and growth difficult to generate, companies are facing some difficult decisions when it comes to stopping the cash burn. Exacerbating the issue is that cannabis stocks have already generated abysmal returns over the past year, and issuing more shares to help fund operations could send share prices even lower; both Curaleaf and Trulieve trade near their 52-week lows, and are down more than 50% in the past 12 months.
Generating positive cash from day-to-day operations has been a challenge for both of these companies:
Are investors better off avoiding pot stocks?
There's no light at the end of the tunnel right now for cannabis investors. The industry isn't proving to be resilient to inflation, and if a recession hits, things may get even worse for MSOs. Ironically, cannabis companies that aren't focused on expansion may be the best growth plays for investors in the long run. By conserving cash and improving their financials, those are the types of companies that may be in the best shape to come out from whatever economic challenges may lie ahead for the industry.
Cannabis companies were never safe buys to begin with given their lack of profitability and the U.S. federal ban on pot, and now they are even riskier. Although these stocks may seem cheap now, investors who are unprepared to take on the risk and are unwilling to potentially have to hold on to them for several years are better off going with safer growth stocks outside the cannabis industry.
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