Investors Sour on Pot Stocks Despite a Growing Market

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That unusual odor wafting from the stock market’s doghouse are the cannabis stocks. Even steady growth in their sales reports leaves investors cold.

Earlier this week, the 22-state operator

Curaleaf Holdings

(CURLF) reported 8% quarter-over-quarter sales growth for its June quarter. The largest chain,

Trulieve Cannabis

(TCNNF), has had 49% year-over-year growth. But it recently reported its sequential growth rate had slid to 0.6% for the June quarter, and dialed back its guidance for the year’s sales.

The news left Trulieve stock down 7% this week, to $12.98, in over-the-counter trading–where shares of state-licensed cannabis firms are consigned because of weed’s federal illegality. Trulieve share are down 50% for the year. Curaleaf stock is up 3% on the week, to $5.96, but still down one-third this year.

After its Monday evening report, Curaleaf chief executive Matt Darin told Barron’s that while value-priced products were in higher demand as many customers economize, the sales of Curaleaf’s premium brands have held up well. That helped the company widen its earnings before interest, taxes, depreciation and amortization (with adjustments for stock compensation and acquisitions) by 2.2 percentage points sequentially, to $86 million, or 25.6% of June quarter’s $338 million in revenue. Counting those excluded expenses, Curaleaf had a net loss of $28 million, or 4 cents a share, while operating cash flow was $12 million.

The start of recreational sales in New Jersey also contributed to Curaleaf’s improved results in June. Before this quarter’s end, Darin hopes to open a store in Bordentown, NJ, that will be the company’s largest. Around year’s end, he looks forward to the launch of recreational sales in Connecticut. Sometime later, New York could begin its long-delayed opening of recreational sales in what Darin says could become a $4 billion market.

Curaleaf has distinguished itself from its U.S. rivals by investing in the European market. On Tuesday, it announced a deal to buy a 55% stake in Four 20 Pharma, one of the largest medical cannabis sellers in Germany. That nation is on track to start recreational sales around the end of 2023, and Curaleaf bets that other European nations will soon follow.

Europe should be more profitable than America, says Darin, because Curaleaf will be allowed to produce marijuana in its low-cost Portugal facilities and ship it across the borders of any member state in the European Union. Taxation will also be lighter than in the U.S..

“Europe is what interstate commerce will look like in the U.S., should that ever take place,” says Darin.

Trulieve’s earnings report on Wednesday was more subdued. Sales edged up from $318 million in the March quarter, to $320 million in the June quarter, as patient growth slowed in the Florida medical market that contributes more than half of Trulieve’s sales. The company improved its cash profitability, with $111 million in adjusted-Ebitda that represented 35% of the quarter’s sales, compared with 33% in the March quarter.

Last year’s acquisition of Harvest Health gave Trulieve the country’s largest store-count, with 175 dispensaries in 11 states. But the decision to shutter underperforming California locations, along with weak wholesale revenue in economically strapped Pennsylvania and Arizona, left a June quarter net loss of $23 million, or 12 cents a share.

For the first time in its fast-growing history, Trulieve trimmed its forward sales guidance, reducing the low end of its 2022 sales forecast by 5%, to $1.25 billion. Adjusted Ebitda should range between $415 million and $450 million, said the company.

Speaking with Barron’s, Trulieve chief executive Kim Rivers described the macroeconomic environment around her industry as “very rapidly changing.”

She looks forward to the start of medical marijuana sales in southeastern states like Georgia. And she’s optimistic about the prospects for recreational sales legislation in Trulieve’s states of Pennsylvania and Florida. Pennsylvania will feel pressure as New Jersey ramps up recreational sales, she says, while Florida voters seem supportive of ballot initiative scheduled for 2024.

With its vibrant tourist trade, says Rivers, recreational sales in Florida would be a “game-changer” for the industry.

Write to Bill Alpert at william.alpert@barrons.com