Medmen Enterprises Inc: This $1 Pot Stock a Contrarian Opportunity?

MedMen Enterprises Inc This $1 Pot Stock Could Be a Contrarian Play
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Why MedMen Stock Deserves Investor Attention

You don’t have to be a contrarian investor to see why MedMen Enterprises Inc (OTCMKTS:MMNFF, CNSX:MMEN) stock could be worth considering.

But if you are a contrarian investor, then this just might be the biggest opportunity on the market.

Unless you’ve been living under a rock, you’ve probably heard of the cannabis boom. Once deemed a highly illegal substance, pot has now grown into a full-fledged industry, with some companies commanding billions of dollars in market capitalization.

In recent months, though, sentiment has changed toward the marijuana sector.

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Investors seem to have realized that, while the marijuana industry has serious growth potential, not every pot company can achieve what it set out to do. And, as another earnings season has kicked off, anything that’s less-than-stellar could trigger a sell-off.

MedMen Enterprises Inc happens to be one of the heavily sold-off pot stocks.

Headquartered in Culver City, California, MedMen operates 32 cannabis retail stores, meaning it is already one of the bigger players in America’s legal pot retail business.

And that was just a start. Including its pending acquisitions, the company is licensed for 70 retail stores in nine states. (Source: “Corporate Presentation October 2019,” MedMen Enterprises Inc, last accessed October 30, 2019.)

MedMen reported earnings on October 28 after the closing bell—and investors didn’t take the news that well. In the trading session following the earnings release, MMNFF stock plunged by a staggering 21.6%. Ouch!

And things didn’t get much better after that. On October 30, when the U.S. Federal Reserve lowered its benchmark interest rates and the market rallied, MedMen stock slipped another 4.6%.

Usually when you see a stock dropping by this much, it indicates that something has gone seriously wrong at the company. So, is this the case with MMNFF?

Let’s take a look.

MedMen Enterprises Inc: Were Earnings That Bad?

MedMen’s latest earnings report was for the fourth quarter of its fiscal 2019, which ended June 29.

During the quarter, the company generated $42.0 million in revenue. The amount represented a 15% increase sequentially and a whopping 104% increase year-over-year. (Source: “MedMen Reports Fourth Quarter and Fiscal Year 2019 Financial Results – Designated News Release,” MedMen Enterprises Inc, October 28, 2019.)

Compared to what most other publicly traded companies have been doing, MedMen’s triple-digit year-over-year top-line growth rate is quite commendable. In fact, the number looks impressive even by pot industry standards.

In the fourth fiscal quarter, MedMen achieved a gross margin of 50% across its retail operations. While this is lower than the 53% gross margin in the third quarter, it was due to new store openings, which tend to have lower gross margins at first.

The full-year results looked even better. In MedMen’s fiscal 2019, the company earned $130.0 million in revenue, which more than tripled the $40.0 million earned in its fiscal 2018.

The company’s gross margin after biological asset adjustment came in at 47% for the year, marking a massive expansion compared to the 35% achieved in the previous fiscal year.

“Fiscal 2019 was a transformative year for MedMen, with over two million completed retail transactions to date and revenues increasing 227% year-over-year,” said MedMen’s Co-Founder and Chief Executive Officer Adam Bierman. (Source: Ibid.)

“Our success was due, largely in part, to our loyal customer base. Throughout the year, we served over one million customers from all 50 states and more than 100 countries. In California, the largest cannabis market in the world, MedMen surpassed a record $110 million in annualized run-rate retail revenue,” he added.

So, why did MMNFF stock plunge big-time on the news?

Well, the answer might lie in the bottom line.

In the company’s fiscal-year 2019, net loss attributable to shareholders of MedMen Enterprises was $79.1 million, or $0.75 per share.

But here’s the thing: while the company incurred a hefty loss, the size of that loss on a per-share basis was actually narrower compared to the prior fiscal year. In MedMen’s fiscal 2018, net loss attributable to owners of MedMen stock was $1.69 per share.

MedMen Enterprises Inc (OTCMKTS:MMNFF) Stock Chart

Chart courtesy of StockCharts.com

Analyst Take

With the latest downturn in pot stocks, MedMen stock now trades at just over $1.00.

At the end of the day, keep in mind that MedMen Enterprises Inc is one of the most recognized pot retailers in America. It has successfully capitalized on first-mover advantages by opening stores in prime locations such as Beverly Hills, Venice Beach, and New York’s Fifth Avenue.

Since the beginning of 2018, MedMen’s stores have completed two million transactions and have already started to build consumer loyalty.

As the regulatory environment further eases in America, I wouldn’t be surprised to see this trusted retailer further expand its business.

For this contrarian play to pay off, you’d need the prevailing sentiment to change toward MMNFF stock. One thing that could lead to that change is another good earnings report.

You see, the results we just discussed were for the fiscal quarter and year ended June 29, meaning another quarter has already passed. Results for the September quarter—the first quarter of MedMen’s fiscal-year 2020—will be released on November 26 after the closing bell.

If the company can keep growing its top line while continuing on its path toward profitability, MedMen stock could make a comeback.