That was a scary October. The Dow (DIA) fell about 9% and the S&P 500 (SPY) fell about 10% from October 3 to October 29. While I have warned a recession could be near, I also noted that it probably would not happen till sometime between October 2019 and February 2020. And since the S&P 500 seems to start falling 6-12 months before a recession, the peak could be anywhere between October of 2018 and August of 2019.
Betting that there would be a Santa Claus rally in November and December before a possible market peak in early 2019, I bought MedMen Enterprises (OTCQB:MMNFF) on October 29, figuring that the stock was undervalued after plunging nearly 34%. It looks like my timing was near perfect as both the Dow and the S&P 500 bottomed on October 29 and are now up about 3% since. Medmen bottomed in the afternoon on October 29 and is up about 31% since. Should I hold, sell, or take some profits?
One of the hottest sectors in the market has been marijuana due to recent legalization in Canada. But fellow contributor Biotech Beast warned about possible overvaluation in the sector in his article “October 17: Get Ready To Dump Pot Stocks.” However, if the U.S. were to have a similar legalization as Canada, maybe there will be another marijuana wave. Democrats plan to pass a bill to “end federal prohibition of marijuana” if they take control of the House of Representatives. Plus, with support growing in the Senate and President Trump saying he will likely support marijuana reform, federal marijuana reform seems a likely possibility.
Having grown rapidly by acquisitions, Medmen has become one of the largest providers of medical marijuana in the U.S. After issuing 27 million shares at $5.25 per share in a RTO (reverse takeover) on May 29, 2018, the California based medical marijuana company’s stock opened for trading on May 30 at $3.38 per share. It then slowly climbed to $4.22 on October 10 before surging to an intraday high of $7.57 on October 18 and closing at $6.89. The stock then plunged 33.6% to an intraday low of $4.25. That plunge looked like a good time to buy.
From its technical graph after the close on Friday, October 26, the shares seemed oversold and nearing support. As shown below, the stock formed a bullish rounded bottom between mid-September and mid-October with a target of about $6.50 sometime between mid-November and mid-December. The stock price hit its 50-dma with support at about $4.15. The W%R was oversold, while the RSI was slightly more oversold than overbought. The price increased in three of the four times the RSI and W%R were at similar levels as shown by the orange lines. The lower Bollinger Band was $3.20, and the upper Bollinger Band was $7.21. First resistance, second resistance, and third resistance were $5.17, $5.50, and $7.50 respectively.
Yahoo Finance had a price target of $6.64 on October 27. Medmen’s 2018 fiscal year revenue was $39.8 million, up 1,390% year over year. Shares outstanding as of October 17 was approximately 441 million. When the share price was $4.67, the market cap was $2.06 billion, and the price to sales ratio was 51.75. While this was high, leading Canadian marijuana company Canopy Growth Corporation (CGC) has a price to sales ratio of 141.83 using a market cap of $12.39 billion and yearly revenue of $87.37 million. That gives a price of $12.80 if Medmen were priced similar to Canopy Growth. But fellow contributor Cornerstone Investments calculated that the total shares is 586 million after the PharmaCann deal. That would give Medmen a price to sales ratio of 68.76 on October 27, and gives a price of $9.63 if Medmen were priced similar to Canopy Growth. Using all this and my price target of $6.50, I figured it was safe to buy Medmen on Monday, October 29 at $4.70/share.
Since then, shares fell about another 10% to $4.25 by 3:00 p.m. EST on October 29 before surging 31.0% to close at $6.00 on Friday. Shares are getting closer to my $6.50 target but is still far below the $9.63 calculation above. Yahoo Finance increased its price target to $6.75. Third resistance was $7.50, and the upper Bollinger Band was $7.21, so it seem possible that shares could continue rising. And shares could run all the way to $12.80.
However, the stock’s technical graph after the close on Friday, November 2 says that while the shares are not yet overbought, they could face a pullback. The target is still about $6.50 sometime between mid-November and mid-December based on the bullish rounded bottom between mid-September and mid-October. The W%R is halfway between overbought and oversold, while the RSI is close to overbought. And the price decreased in four of the five times the RSI and W%R were at similar levels as shown by the purple lines. The lower Bollinger Band is $3.68, and the upper Bollinger Band was $7.18. First resistance, second resistance, and third resistance were $5.17, $5.60, and $7.70 respectively.
The two graphs below were created from the fourth quarter and fiscal year 2018 financial results, Yahoo Finance: income statement, and Yahoo Finance: price graph. A straight line estimate of revenue gives:
- $54.53 million for 2019 fourth quarter and $169.83 million for the 2019 fiscal year
- $86.71 million for 2020 fourth quarter and $298.55 million for the 2020 fiscal year
The current ratio dipped below one (a red flag) in the third quarter but bounced to 1.36 in the fourth quarter. A current ratio below one means that current liabilities are greater that current assets, and thus dilution may be needed.
It looks like I should take profit soon, but I plan to the stock hold for the long run. The revenue graph looks promising, and I am pleased that the current ratio is rising. Hopefully cost of revenue and expenses will fall, as if they continue rising, that could be a red flag.
Disclosure: I am/we are long MMNFF.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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