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Why Is This Pot Stock Crushing Canopy Growth (TSX:WEED) in 2020?

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When it comes to cannabis investing, you need to brace for volatility and wild price swings. Pot stocks were trading at record highs 18 months back and have since burnt investor wealth significantly.

One of the world’s largest marijuana companies Canopy Growth (TSX:WEED)(NYSE:CGC) is trading at $20.9, which is 70% below its record high. Similar to cannabis peers, Canopy is also struggling with structural issues that include low profit margins, high inventory levels, and lower than expected demand.

Canopy has been one of the most popular pot stocks given its huge presence in Canada and a multi-billion-dollar investment by Constellation Brands.

Canopy Growth aims to reduce cash burn

Canopy manufactures and sells cannabis under brand names such as Tweed and Tokyo Smoke. In its fiscal first quarter of 2021, the company reported sales of $110 million, a year-over-year growth of 22%. The uptick in sales was primarily driven by medical marijuana sales in Germany.

However, the company’s gross margins fell by 20% in Q1 of fiscal 2020 to a mere 7% in Q1 of fiscal 2021. Canopy Growth attributed this decline to high fixed costs in anticipation of higher growth.

Though Canopy Growth’s cash balance stands at $2 billion, it has fallen from $3.1 billion in the prior-year period. The company’s cash burn and lower profit margins will continue to impact stock prices in the near-term.

Canopy has shut down unprofitable units and reduced its selling, general and administrative costs in 2020. In April this year, it exited operations in South Africa and Lesotho and closed several facilities, and reduce its full-time workforce. While these measures helped Canopy to reduce SG&A expenses by $10.3 million in Q1 the company remains unprofitable.

In Q1, its EBITDA loss stood at $92 million, compared with a $93 million loss in the prior-year period. While it continues to improve the bottom-line, Canopy should benefit from demand for Cannabis 2.0 products such as vapes, edibles, concentrates, and beverages.

In Q1, derivatives products accounted for 13% of Canopy’s sales while the company expects beverage products could help improve gross margin to over 40%.

A profitable pot stock

One of the top-performing pot stocks is Trulieve Cannabis (CNSX:TRUL), a vertically integrated cannabis operator. Trulieve is profitable and growing sales at a fast clip. In 2019, the company reported sales of US$252.8 million with an operating income of US$86 million.

In 2020, analysts expect sales to rise to US$490.16 million, indicating a forward price to sales multiple of 4.1 which is reasonable given the company’s stellar revenue growth. In Q2, Trulieve’s sales rose 109% to US$120.8 million while its EBITDA was up 92% at US$60.5 million.

Trulieve has targeted aggressive expansion in Florida where it has 57 of its 59 dispensaries. Florida might become the third-largest-selling-legal-weed state in the U.S. by 2024 and Trulieve’s massive share of 50% in the state will continue to drive top-line growth.

Legal cannabis spending in Florida might reach US$2.5 billion in 2024, up from US$660 million in 2019, according to BDS analytics. Medical cannabis is expected to account for US$2.2 billion of total cannabis sales, which means Trulieve is well poised to benefit from this market expansion.

Trulieve has been profitable for 10 consecutive quarters, making it one of the top marijuana stocks to buy and hold right now. The stock went public back in September 2018 and has since returned 60% to shareholders.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool owns shares of and recommends Constellation Brands. Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.

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