Medical Marijuana (NASDAQOTH: MJNA) is only a matter of months away from its 10-year anniversary as the first publicly traded cannabis stock. Despite its elder-statesman status, however, Medical Marijuana hasn't been kind to investors since going public. In fact, the stock is down by nearly 90% since its IPO in March of 2009.
Can this beaten-down cannabis stock blaze an epic comeback? Let's take a deeper look to find out.
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The case for Medical Marijuana
The U.S.-based Medical Marijuana is a somewhat unique player in the vast landscape of cannabis stocks. Instead of attempting to compete in the medical or recreational marijuana space, Medical Marijuana is focused on the "development, sale and distribution of hemp oil that contains naturally occurring cannabinoids, including cannabidiol."
By doing so, the company is able to market its products in most geographies within the United States, as well as in a handful of ex-U.S. territories, with little legal pushback. Medical Marijuana's hemp-based oils, after all, are reportedly derived from parts of the cannabis plant that some in the industry have argued are excluded from the Controlled Substances Act. It's important to note, though, that this claim of widespread legality has been challenged in some U.S. jurisdictions.
Putting aside the legal risks for the moment, Medical Marijuana's strategy of focusing on this underserved part of the market might turn out to be a wise move. The lowdown is that there is a growing awareness among older adults about the potential health benefits of cannabis and cannabis-derived products like hemp oil for a host of age-related chronic diseases. As proof, the so-called baby boomer generation has started to experiment with these alternative therapies in significant numbers.
And this radical change in public opinion among older adults appears to be impacting Medical Marijuana's top line in a favorable way. In the second quarter, for instance, the company reported its largest-ever sales revenue in a single quarter. Medical Marijuana, therefore, might be close to hitting a key inflection point in terms of sales and profitability.
The case against Medical Marijuana
While there are some solid reasons to be optimistic about this company's future, there are also some glaring problems that potential investors should bear in mind. First off, Medical Marijuana has been losing truckloads of cash on an annual basis for a long time. And this negative cash flow issue is now becoming a serious problem. After all, the company reported having a mere $3 million left in its coffers at the end of the second quarter.
Making matters worse, Medical Marijuana's share price of less than $0.10 a share at the time of writing means that a secondary offering is probably off the table for the time being. Therefore, the company will likely have to find other ways to raise capital that might not be shareholder friendly. That's not to say that Medical Marijuana is destined to go belly up, but the company definitely needs to curtail expenses and ratchet up its profitability in a hurry.
What’s the verdict?
Although the high-value U.S. cannabis market has been growing like a weed of late, and Medical Marijuana's recent top-line growth seems to reflect this fact, this company is hard to recommend as an investment vehicle as things stand now.
The bottom line here is that Medical Marijuana needs to address its long-term capital requirements and perhaps perform a reverse split as well in order to attract serious long-term investors. Institutional investors, after all, aren't going to flock to a penny stock trading on the pink sheets.
That being said, the company's exceptional second-quarter results — combined with the industry's stellar long-term prospects — imply that a turnaround might be taking shape. As such, this downtrodden cannabis stock might be worth considering as a speculative watchlist candidate.
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George Budwell has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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