When most people look at an earnings report, their eyes glaze over. But because you’re a founding member of the National Institute for Cannabis Investors, I’m going to teach you how to separate the signal from the noise. That’s how you find the biggest and best profit opportunities…
As we speak, the U.S. cannabis industry is in the heart of earnings season, meaning hundreds of firms across the country are releasing their financial results for Q4 2018.
Now, typically, investors lean on these earnings reports to gain insight into how well a company is run or if its performing well.
And, for the most part, I agree it’s a great tool.
IF you know what to look for.
Frankly, companies know that investors look to these reports to make decisions. So you can bet they are going to present the rosiest picture of the company’s financials as they can.
The key is knowing how to look beyond the “flash” to spot the real diamonds in the rough.
That’s why today, I’m going to share the “magic formula” I follow when looking through every cannabis earnings report.
Better yet, I’ll share three things you should always ignore.
There are exceptions to every rule, but here are some tips which might help you navigate all these earnings reports more successfully.
Three Things to (Usually) Ignore
The first is revenue during the fourth quarter.
I know that may sound surprising – as revenue is the life blood of a company – so I don’t suggest completely ignoring that key indicator.
But numbers from Q4 are often meaningless.
For example, Acreage Holdings had revenue in Q4 right around $10.5 million. Looking forward, it’s meaningless.
Adjusting for various acquisitions the company made between October 1 and December 21, revenue would have been more than double that – $22.9 million to be exact.
And even that is too low.
Many dispensaries opened towards the end of the year, and it always takes a few months or even a year to get the stores’ revenue up. That doesn’t matter for a company with hundreds of stores with only a few of them opening during the quarter, but it’s a huge difference for these small, rapidly growing cannabis companies.
Speaking of dispensaries opening, don’t put too much stock into current store counts.
A company’s dispensary count is one of the most important metrics of its success as it spreads across the United States. But investors should be looking forward, not back.
By the end of the year almost all of the big U.S. multi-state operators (MSOs) will have many more dispensaries than they did back in December, or even right now. A far more important piece of information to focus on is the company’s build-out plans. That will give you a much better indication of where the company you’ve invested in is heading.
Finally, don’t get caught up in the share price right after earnings. That is, unless a stock is being oversold, allowing you to pick up shares at a discount.
A lot of investors trade stocks immediately after an earnings announcement. Some of them have different motives than you, so keep that in mind if you see a share price wildly fluctuate.
Specifically, a lot of people who have big profits in a stock often set an earnings date to sell some of their shares. All of these people with different motivations and different levels of knowledge mean that stocks of smaller companies, like cannabis companies, often don’t react the way a larger stock might after earnings.
For a bigger company, that indicates that people were disappointed with the earnings.
In the three trading days since, the stock price climbed 20%.
The lesson being – don’t let the knee-jerk reactions of others inform your analysis of a company or its stock.
Three Things to (Usually) Focus On
Because some expect the U.S. cannabis industry to eventually be worth $1 trillion, looking at where companies operate and their expansion plans are important tidbits to review during an earnings release.
Some states are better than others for near-term revenue generation, but in the long battle to build a national brand, more states is better.
Alternatively, a company can have its full focus on a single state, making it an attractive acquisition candidate. If a company is only in two or three states and doesn’t have a clear path to entering more, it’s reasonable to ask the company’s executives whether they see the company as an attractive acquisition candidate or what the company’s plans are for the day it is surrounded by bigger, better-financed competitors.
The second thing to usually focus on is cash and cash burn. Most cannabis companies are losing money on an operating basis, and they are spending millions of dollars in capital expenditures.
That’s fine, because they are spending in anticipation of future revenues. In other words, they think that how they are spending their money will make them even more money in the future.
However, they can’t do that forever.
Looking at how much cash the company has left and how much it is using per quarter can give you a rough idea of when the company must turn profitable or raise more capital before it may be forced to shut its doors.
When a company makes its more complete regulatory filings, focus on a section called “liquidity and capital resources,” or something with a similar name for more details.
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Finally, take a look at the projections a cannabis company releases during its earnings.
Many companies do not offer projections of future revenue or cash flow. But for those who do, that is the reason why most investors are holding them.
If a company beats its public projections, its stock price will generally go up. If company executives fall short of the projections they made, the stock price will almost certainly go down.
I hope you find these tips helpful for your own cannabis investments. For those of you who prefer to stick to the stocks we recommend at the Institute, be assured that I’ll have full reports as each company reports earnings.
Executive Director, National Institute for Cannabis Investors
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17 responses to “This Is How to Read a Cannabis Earnings Report like a Pro”
April 04 2019