Cannabis stocks are the hottest asset class in recent years and a major reason why is because they have been on fire. However, not all cannabis companies are booming. These three words- “material weakness,” “impairment,” or simply “write-off”- can signal trouble ahead for some marijuana giants and investors should pay attention to these signs when evaluating their holdings.
The “cbd stocks to watch” is a phrase that has been used in cannabis earnings reports for quite some time. The 3 words are “cannabis,” “earnings,” and “reports.”
The cannabis earnings season is upon us, and there are a few phrases to be aware of, since they may indicate disaster.
In November, several cannabis firms will release their quarterly results. And it may be tough for investors to analyze the data since cannabis financial reports are typically riddled with adjustments, gains, and losses, making it impossible to discern if the firm had a strong quarter.
However, there are a few fast techniques to look beyond the company’s top and bottom lines to determine if there are any issues you should be paying particular attention to. Here are three words you don’t want to hear on an earnings call or in a report.
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Impairment charges or write-downs are regrettably typical in the cannabis industry’s financial reports. While it is not included in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) calculations, investors should not disregard it. Because an impairment charge or write-down indicates that the valuation of an asset on the balance sheet is wrong or has changed, this is the case.
For instance, inventory values may need to be written down if things have been sitting for too long and the company no longer feels it can sell them for the same price as before. It may not be forthright about the cause, but it’s still a concern, particularly if the impairment is recurrent.
Canopy Growth (NASDAQ:CGC) is well-known for often announcing impairment charges in its financial statements. Asset impairment and restructuring charges of 2.5 million Canadian dollars were disclosed in the company’s latest results for the quarter ended September 30. Though that’s an improvement over the CA$46 million it recorded a year ago on that line item. However, when looking at the latest six months, that total jumps to CA$81 million, up from CA$59 million the previous year. The company’s asset impairment and restructuring charges were CA$534 million in fiscal 2021 (which ended on March 31), almost as much as its ret revenue of CA$547 million.
Canopy Growth has been a poor investment over the last year, plummeting 43 percent while the S&P 500 has up 34 percent.
Another term that investors should be wary of is “warrants,” which might be mistaken for dilution. A warrant enables the holder to purchase more shares at a certain price. And the more warrants a corporation holds, the more likely it is that a torrent of shares will be released when the stock’s value increases.
This one is more difficult because warrants may not appear in a company’s earnings press release. However, they are mentioned in the actual earnings report, when the corporation reveals the value of warrants and their exercise prices. The exercise price is important because if a warrant holder’s stock price rises over that value, the warrant is in the money, and there’s an incentive to utilize it to purchase shares of the company (assuming, of course, there are no restrictions to doing so).
The number of references to “warrants” in cannabis company Sundial Growers’ financial report for the month ending June 30 astonished me — there were 100. It may be difficult to keep track of all the various sorts of warrants and the laws that govern their execution. That’s why a simple guideline to remember is that if anything is too complicated or tough to execute, it’s usually better to avoid the stock, since it might just be a dilution machine.
Although Sundial Growers’ stock has increased by 177 percent in the last year, this was mostly due to the early-year meme stock mania. Its stock has dropped 15% since the end of January, while the S&P 500 has increased by 26%.
“Compression” is the most entertaining term on earnings reports to me. It reminds me of real estate agents who characterize a modest property as “cozy” rather than just stating that it is small. Even though it seems prettier, the truth remains the same.
On an earnings report, you could encounter the term “price compression,” which is a better way of saying “the firm has decreased its prices.” It’s not a phrase that investors want to see in an industry where margins are tight and profits are hard to come by, since it indicates that a company’s bottom line is degrading or may deteriorate in the future.
Canopy Growth blamed lower gross margins in the second quarter on “price compression in the Canadian recreational market,” according to the company’s statistics. In the third quarter, the company’s gross margin was a negative 54 percent (compared to a positive 19 percent a year earlier). Even after excluding noncash items like as write-downs, the margin would have been a meager 12% of sales in the most recent quarter. That doesn’t give Canopy Growth much of a chance to turn things around; the firm lost CA$163 million in adjusted EBITDA for the quarter, almost twice the CA$86 million loss it suffered a year ago.
With no indication that the “compression” issue will be resolved, investors can anticipate weak margins in the future.