Here’s Why CannaRoyalty Corp’s (TSXV:CRZ) Q2 Results Look a Little Odd
CannaRoyalty Corp (TSXV:CRZ) released its quarterly results yesterday. And while the company achieved strong sales growth and an impressive profit, it’s not as good as it seems. Sales were very strong for the quarter as the company’s top line of $3.5 million was a huge improvement over the $960k that it generated just a year ago, although significant growth we’ve come to expect from pot stocks these days, this type of increase is definitely exceptional.
That being said, profitability is what keeps many value investors away from pot stocks. But this past quarter, CannaRoyalty netted a profit of over $9 million, which seems ridiculous given that its sales were not even half of that. The reason behind the absurd results is that the company pocketed a sizeable $15 million change in fair value from its investments this quarter, which effectively wiped out the impact of higher costs and lower margins.
Seeing abnormalities like this is, unfortunately, par for the course when it comes to pot stocks. Where it is a change in value from its plants or from investments, it is these fluctuations that are having more of an impact on earnings than a company’s day-to-day operations.
That’s a troubling trend for a couple of reasons. The first is that it introduces a lot of volatility to the company’s earnings and it makes it very difficult, if not impossible, to predict how a company might perform in a quarter since operations may have a small impact on the company’s overall earnings. The second is that while CannRoyalty was able to benefit from a change in value this quarter, it could just as easily suffer a loss next quarter.
This is a great example of what kind of risk investors are exposing themselves to when investing in cannabis stocks. These are not your typical blue-chip investments that follow a somewhat predictable pattern. And while that might generate significant returns, it’s not without taking on significant risk as well.