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Pot Stock MedMen Enterprises Should Reward Patient Investors

MedMen Enterprises (MMNFF – Get Report) recently announced it opened three new retail outlets in Florida, bringing the total number of operating stores in the U.S. to 29.

At this time, MedMen has four retail stores in Florida opened, and has licenses to open another 31, bringing the total ceiling in the state to 35. Before the end of 2019 it has plans to open another eight in the Florida market.

The three newest stores are located in Key West, Pensacola, and St. Petersburg.

In this article we'll look at why investors will need to be patient wit MedMen and why it'll take time before it generates a profit.

Current cannabis investor expectations and sentiment

With some of the larger cannabis companies having disappointing earnings results over the last couple of quarters, combined with some negative news associated with poor management decisions, the overall cannabis sector has been punished.

Consequently, the market has started to, prematurely in my view, look for cannabis companies to start generating a profit. That's partly because of the steep losses, and also in response to the accompanying negative sentiment.

Why I say it's premature is because, for the most part, companies that have been able to generate a profit have been smaller companies with less ambitious long-term goals. They will enjoy some share price strength in the near term, but farther out once many of the larger competitors turn from expansion to profitability, they'll vastly outperform the smaller cannabis companies that have been enjoying share price strength.

MedMen falls into the category of spending on expansion, so shareholders will need to be patient as the company builds out its national footprint in preparation for long-term growth and profitability.

Companies with aggressive expansion plans like MedMen aren't going to be able to turn a profit until they scale further. That said, they do need to communicate their pathway to profitability. As Aurora Cannabis recently discovered, it's best not to start fixing specific dates when that'll happen, but to lay out the way the company will achieve profitability within its business model.

What the company needs to continue to do

Since rapid expansion is a big part of MedMen's business model, it's imperative for the company to prove it can continue to increase revenue as it spends. This is one of the reasons Canopy Growth has been taking such as big hit, as it failed to meet revenue expectations in the last quarter, missing by C$21.27 million.

MedMen, on the other hand, has done well in the last couple of quarters, generating $36.6 million in the third fiscal quarter, and bumping that up to $42 million in the fourth fiscal quarter.

Another important part of MedMen's long-term success will be its geographic diversity. In the last quarter about two-thirds of the company's revenue came from California. Over time, the other markets it competes in should reduce its exposure to California as measured by percentages.

With each U.S. state having different operating guidelines, something that could be changed in California could potentially disproportionately have an impact on the performance of MedMen. Scaling to different states reduces that exposure and risk.

MedMen Stock Could More Than Triple

The word on the Street rings largely bullish on this cannabis stock, with TipRanks analytics demonstrating MedMen as a Buy. Out of 7 analysts polled by TipRanks in the last 7 months, 6 are bullish on MedMen shares, while only one is bearish. With a return potential of nearly 290%, the stock's consensus target price stands at $5.40. (See MedMen's price targets and analyst ratings on TipRanks)

Conclusion

MedMen hasn't gained much traction lately because of overall negative market sentiment toward the cannabis sector, and the market starting to look for profitability.

Once things turn more positive, I believe the market will realize it's premature to expect profits from the companies that are aggressively scaling. In the near term that's a negative catalyst, but further out it's going to be a huge positive.

MedMen is one of the companies investors will have to manage expectations with in the near term. It has a lot of upside potential over time, and once it starts to reduce spending, its performance over time looks very promising concerning profitability.

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