Marijuana Stocks Shouldn’t Be so Focused on Profits: Here’s Why

Marijuana Stocks Shouldn't Be so Focused on Profits Here's Why
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Marijuana Stock Profits

The buzzword du jour in the marijuana industry over the past few weeks has been, without a doubt, “profits.”

While a potential recession and a stock market correction have both served to curb the growth among marijuana stocks as of late, we shouldn’t forget that right before that, the industry was facing a very important question: Is now the time to focus on profits or on growth?

This question served to divide investors and analysts alike.

And the question was far from academic; Canopy Growth Corp (NYSE:CGC) was said to have parted ways with its CEO Bruce Linton precisely due to his vision of continued growth rather than profits.

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Now that we’re many weeks out from that industry-shaking decision, it’s time to make our first re-evaluation (the first of many, I’m sure) on whether profits truly are where the industry should be turning to right now, or if it would be better sticking to a growth-focused plan.

First, let’s address the elephant in the room, the potential recession that has precipitated a massive fall in pot stock prices across the board.

The thing about profits is that, when people have less money, they tend to buy less. You hardly need a PhD in economics to figure that one out. If a recession were to hit, well, I have no doubt that legal marijuana sales would at least be somewhat hurt.

I leave the caveat “somewhat” in there because, at times, smaller recreational products like alcohol and cigarettes can be immune to recessions due to their relatively meager cost and their ability to provide people with a brief escape from the serious pains of an economic downturn.

But barring that, we will likely see a decline in sales in the marijuana sector if a recession takes place. What will that do to profits? Wreak havoc.

Now, on the flip side, if you focus on growth, you can say you’re planning to outlast the recession and you’re looking forward to seeing growth during the recovery phase.

It’s hardly solace to investors in the moment, but it speaks to a stronger outlook in the long term, something that investors ought to seek out if they want to emerge from a recession relatively unscathed.

So at this time, frankly it makes sense that companies focus on growth rather than profits.

Furthermore, the trade war between China and the U.S. could very well drive up the cost of packaging materials and other imports, something that could increase overhead and decrease profits.

Again, this is something that a growth-oriented company would be better suited to absorb. If your focus is on profits, then even the slightest slip can throw off a financial report, leading to a slump in share prices.

These types of problems are better handled by older, more stable companies that have developed methods to deal with them. Younger companies that have never faced a recession will likely be more hard-pressed to deal with such tumultuous times.

As such, focusing on growth simply seems like the right course of action. The alternative is to enter an arena where margins for success are razor thin and even the smallest hiccup can send big waves in the stock market.

It’s easier, after all, to sell potential to investors, especially when potential is present in abundance.

Many of the largest markets on Earth remain closed off to the marijuana industry and will likely remain that way for a few years. But when the U.S. and Europe eventually legalize marijuana, that will send share prices soaring. Those eventualities are not “what-if” scenarios, either—they’re inevitabilities.

From this vantage point, growth-focus is the best approach. But don’t take my word for it: just look at the stock market.

APHA Stock Prediction

The first major pot stock to see profits was Aphria Inc (NYSE:APHA). The announcement was met with a lot of love from investors, sending shares up by more than 30% in the span of a day.

Great news, right? But look a little further and you’ll see that those gains were hardly locked in.

As shown in the below chart, APHA stock saw its 30% gain pretty much halved in the following weeks.

Chart courtesy of StockCharts.com

And over the past three months? The Aphria stock is dead-even. So really, all that the company’s profits were able to do was rescue the stock from its nadir and put it back to zero.

The point being that profits often create fleeting warmth in investors unless a company is able to string together multiple quarters of profits one after the other.

Considering the extremely volatile nature of the marijuana industry during a correction, and the looming potential recession, it’s a hard promise to make that profits will be a consistent occurrence.

Aphria management, meanwhile, has not said they’re redefining their business plan around profits. They have treated the profits as a boon to be celebrated, but we’ve yet to see if this will be the company’s new focus.

Analyst Take

The legal marijuana industry is still in its infancy. To focus on profits to the exclusion of growth would be, in my mind, very short-sighted and would ultimately lower the ceiling of the marijuana stocks currently available on the open market.

Capitalizing on the growth in the industry—from the opening of the U.S. market to reduced regulations in Canada—is both an easier sell to investors and a wiser move to make in light of the current economic climate.