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Why It’s Time To Get Serious About U.S. Pot Stocks

With state legalization expanding and financial troubles receding, Wall Street says it’s time to pay attention to U.S. marijuana stocks.




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Their path to profitability is firmer than their better-hyped Canadian counterparts, analysts say. The playing field is bigger, even though cannabis isn’t federally legal yet. Sales growth for the biggest producers is stronger. And the growth is helping reshape the U.S. cannabis industry as big companies buy up smaller ones.

“Profitability between Canadian and American operators is night and day,” said Eric Des Lauriers, a marijuana stocks analyst at Craig-Hallum.

Top U.S. pot producers like like Green Thumb Industries (GTBIF), Curaleaf (CURLF), Trulieve (TCNNF) and Cresco Labs (CRLBF) have operations stretching across multiple legal states. Analysts point to those companies as the best equipped for continued growth in an industry whose sales could surpass $28 billion next year.

Caveats remain. Efforts to legalize marijuana at the federal level face reluctant lawmakers. “Profitability” in the marijuana stocks universe sometimes comes with a few asterisks. Acquisitions are accelerating, but could get complicated. Worries endure about the prospect of an industry dominated by a handful of companies, burying the nation under indistinguishable, low-quality weed that drives away consumers.

“This industry is rife with examples of companies that have become generic corporations that treat this like seltzer water or a generic consumer good,” said Sam Ghods, CEO of Connected, a California-based cannabis producer.

But despite those concerns about product quality, most people following the industry see the legal world expanding, with ample room for gains.


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U.S. States Lift Marijuana Stocks

The U.S. pot industry is emerging after marijuana stocks in Canada, where recreational cannabis went legal in 2018, initially grabbed investors’ attention. Canadian marijuana stocks were the first to arrive on major U.S. exchanges. And they landed big investments from tobacco and alcoholic beverage companies Altria Group (MO) and Constellation Brands (STZ).

In the U.S., 58% of adults now want full legalization, according to the latest IBD/TIPP poll. U.S. lawmakers have tried to advance measures to federally decriminalize cannabis and open up access to basic banking services to the industry. But progress has been faster at the state level.

Recreational cannabis is now legal in 18 states and the District of Columbia. Medical marijuana use is legal in 37. Legal U.S. cannabis industry sales are forecast to jump 23% to around $22.8 billion this year, according to cannabis industry market researcher Headset.

Next year, those sales are expected to accelerate, growing 24% to $28.3 billion. Those are far bigger sales figures than in less populous Canada. There, legal cannabis sales are expected to hit $4.06 billion this year and $5.35 billion next year. That’s a bigger percentage gain, but in a market where the largest producers are still grappling with losses and escalating competition.


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So What Are The Top U.S. Marijuana Stocks?

Based on revenue, Curaleaf is the biggest U.S. pot stock. It had $627 million in sales last year, a 184% rise from 2019.

That’s more than the 37% gain, to $436 million, put up last fiscal year by Canadian weed giant Canopy Growth (CGC). And it’s close to the $685 million that Tilray (TLRY) and Aphria, two Canadian producers that merged in May, said they would have made together over a year. And Aphria’s pharma distribution business, which it separated from cannabis sales, did the heavy lifting on the top line when Aphria was on its own.

Curaleaf runs more than 100 dispensaries across more than 20 states. The company believes it is the market-share leader in New York, and controls a big chunk of the market in New Jersey, Cowen analysts say.

No. 2 is Green Thumb Industries, with $557 million in sales last year. The company has most of its retail locations in Pennsylvania and Illinois, according to Cowen. Marijuana stocks analysts at Cowen have called the stock their top pick for this year.

Trulieve, the third largest with $522 million in 2020 sales, has focused on the medical markets in Florida. But it has expanded its way north. Cresco Labs, the fourth with $476.3 million in 2020 sales, draws a lot of revenue from its wholesale business.

Based on market cap, Curaleaf is also the biggest among U.S. marijuana stocks, with a valuation of around $8.2 billion. Green Thumb’s valuation stands at $6 billion, according to MarketSmith. Trulieve, with adjusted EBITDA of $251 million last year, is worth $4.1 billion.

Other stocks offer ways to indirectly play the U.S. industry. GrowGeneration (GRWG), a hydroponics retailer, has been on an acquisition spree this year. Innovative Industrial Properties (IIPR), a real estate investment trust that buys properties like growing facilities and dispensaries and leases them back, maintains high ratings from IBD.

Where U.S. Marijuana Stocks Stand

Shares of Green Thumb, Curaleaf and other U.S. pot stocks are traded over the counter, while GrowGeneration is on the Nasdaq and Innovative Industrial is on the NYSE. After outperforming the S&P 500 early this year, they have eased off, as seen by their flattened relative strength lines.

Company Symbol Composite Rating Relative Strength Rating EPS Rating Market Cap
Curaleaf CURLF n.a. 26 26 $8.2 billion
Green Thumb Industries GTBIF n.a. 88 66 $6 billion
Trulieve TCNNF n.a. 44 57 $4.1 billion
GrowGeneration GRWG 78 96 66 $2.5 billion
Innovative Industrial Properties IIPR 99 86 96 $5.4 billion

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Cannabis Industry ‘Survivors’

Just a few years ago, losses pockmarked the legal U.S. industry. Some producers burned too much money to secure the licenses needed to do business in legal states. Sales growth didn’t translate into profits. Financing, already difficult in a federally illegal business, risked drying up. Lung injuries linked to cannabis vaping products bought off the street made investors nervous.

MedMen, for instance, tried to get by on sleek dispensaries outfitted with tabletop touch screen tablets. (Elaine Low/IBD)

Some of the U.S. industry’s early shiny objects got tarnished in the process.

MedMen, for instance, tried to get by on sleek dispensaries outfitted with tabletop touch screen tablets. But it retrenched after getting swallowed up in debt and accusations of executive excess.

Acreage Holdings grew its footprint across U.S. states and appointed former House speaker John Boehner to its board. It has since backed away from some expansion efforts and focused on the Northeast and Midwest.

Then last year, analysts say, other companies got it together. Earlier efforts to build out cultivation and distribution infrastructure began to pay off. More people got high to get through the coronavirus pandemic. Analysts also say U.S. states offer more leeway on branding than in Canada, where restrictions can make for bland packaging displays.

Taken together, the top 10 public multistate operators — or MSOs — brought in $3.3 billion in net sales last year, according to Cowen. That’s a 139% increase from the prior year.

“They are survivors after very poor capital deployment in 2018-19, where the companies were in a land-grab state, where they often paid too much for the licenses, and then didn’t have the capital to develop those licenses,” Needham analyst Matt McGinley said of the biggest U.S. marijuana stocks.

Meanwhile, Canadian producers are still losing money after growing too much weed, facing too much competition and dealing with a stunted early retail-store rollout in Ontario.


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Caveat For Weed Profits

Earnings are still an issue. For now, investors looking to buy U.S. or Canadian marijuana stocks must accept that the industry’s profitability standards come with a healthy side of adjustments and, some might say, accounting gymnastics.

The industry’s preferred metric is “adjusted” EBITDA, or adjusted earnings before interest, taxes, depreciation and amortization. The adjustments across North America’s industry can include stock-based compensation, acquisition costs, pandemic-related expenses and changes in the perceived value of the plants.

Still, the big U.S. marijuana stocks have been more consistent in pushing the metric into positive territory than the Canadians.

While federal pot prohibition has kept the MSOs off the big U.S. exchanges, it also has helped keep them more disciplined, analysts say.

“The U.S. MSOs have always had to operate under the notion that they may never be able to raise money again,” Des Lauriers said.

“Whereas, you have the operators up in Canada that started from the get-go selling a story and not a business, and getting hundreds of millions of dollars, sometimes billions of dollars, from strategic investors,” he continued. “You’re seeing them burn hundreds of millions of dollars in cash every quarter.”

Federal prohibition is still the most obvious and significant obstacle for U.S. marijuana stocks. Many banks won’t touch marijuana businesses as long as federal law bans pot. A piece of the tax code, called 280E, also prevents businesses from taking normal operating expense deductions.

Custodian banks have also tried to avoid legal friction. Reuters reported in May that Credit Suisse would stop executing trades of U.S. marijuana stocks. Barron’s reported that same month that Wasatch Global Investors had dumped its holdings in U.S. marijuana stocks for compliance purposes.


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Marijuana Stocks To Get Bigger

Despite those hurdles, medical marijuana legislation has advanced in North Carolina, Alabama and Kansas. Meanwhile, Texas, Louisiana and Minnesota could expand medical pot programs.

commercial marijuana plant operation
Next year, U.S. sales of legal cannabis are expected to grow 24% to $28.3 billion. (Canna Obscura/Shutterstock.com)

The widening legalization map has touched off a nationwide acquisition hunt. M&A personnel have found themselves hopscotching on planes to large cities and remote areas alike, riding around town with local business brokers to scope out potential properties. Some owners of smaller businesses are searching for ways to sell as the difficulty of tracking sudden regulatory changes, and their accompanying costs, wear them down. They’ve found interest from bigger buyers.

Viridian Capital Advisors, which tracks deal making within the marijuana stocks world, said that as of July 16, there had been 130 targeted merger-and-acquisition transactions in the U.S. this year. Those deals carried a total value of $5 billion, a record. MSOs this year have paid upward of $100 million to buy as few as three to six pot shops.

Marijuana stocks analysts debate what the deal making means for the industry. Some say deals at that price can still add to profits. Some have worried that the industry will end up overpaying for properties whose performance won’t match up. Others say the higher valuations will dissuade companies looking for an acquisition.

Still, they say that the cannabis industry is fragmented, and will be for a while, despite the industry’s acquisitive mood. And they say that for any two big producers to fuse together into one, they would have to divest other assets. Cowen analysts said in April they didn’t expect the higher prices to slow the pace of acquisitions.

“That’s why we built out our platform before these valuations became too lofty,” Curaleaf CEO Joe Bayern said. “It’s going to get worse over the next five years as the larger companies try to build out their platform on a national level.”

The M&A boom is spilling over to related sectors. GrowGeneration, for example, has announced 19 acquisitions since last August alone.


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Rush For Green Hits Red Tape

But acquisitions — or vetting potential ones — can get complicated quickly in a business where, historically, record-keeping might function as criminal evidence.

Standard accounting practices, tax returns and corporate documents can be scarce. Cannabis companies might operate on one bookkeeper. They might have nothing more in the public record than filings with their Secretary of State. Deals can require state and municipal approval.

“It’s really a lack of sophisticated business operators, and a lack of really understanding of what it’s like to operate out of the shadows,” said Alexa Steinberg, counsel at Greenberg Glusker in Los Angeles. “We find ourselves doing a lot of catch-up, cleanup, filing back taxes.”

Even for sophisticated business operators, corporate structures can get convoluted. Ghods, the CEO of Connected, said it took nearly a year — and 90% of management’s time — to create a single corporation to hold its assets. And every greenhouse, meanwhile, is sensitive to its local climate.

“Many companies in this industry are currently in the ‘roll-up’ phase where they want to acquire companies and mesh them into one overarching company with the same standard practices,” said Mark Pitchford, a roughly 20-year industry veteran and lead cultivator at Ayr Wellness (AYRWF), another MSO. “In doing this, they forget that every facility is different in its own way.”


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‘Extremely Tiring’

One such roll-up involved Medicine Man. The Denver-based operator of four dispensaries and a cultivation facility decided in June to sell to the MSO Columbia Care (CCHWF).

Medicine Man was founded in 2009 and run by siblings Sally Vander Veer and Andy Williams. The company grew out of their brother’s passion for cultivating weed in the basement. Their mother helps count money.

“He’s the accelerator, I’m the brake,” Vander Veer said of Williams. “I’m the one in the background saying ‘I don’t know if that’s a good idea.'”

The gray market of the early days was dangerous. More than a decade ago, their brother, Pete Williams, said he once arranged to make a legal cannabis delivery to a house for “a friend of a friend of a friend.” When he procured the cannabis in the kitchen, the man taking the delivery punched him in the face. Blood was in his eyes. He was being robbed, and he tried to get away. But the man pistol-whipped him and took the pot. Pete drove himself to the hospital to get stitches. He didn’t feel comfortable calling police.

Now, large marijuana stocks are consolidating the industry. Yet enough lawmakers, meanwhile, still oppose legal marijuana. Expanding independently is difficult.

Vander Veer said the decision to sell to Columbia Care was not difficult. But after 12 years in the cannabis business, Andy Williams said, “It’s extremely tiring.”

“It’s a constant battle,” he said. “You have to defend the ground that you’ve taken.”

Writing On The Wall

Others in the industry say that the big MSOs will devolve into clearinghouses for low-quality cannabis that might hurt demand and U.S. marijuana stocks.

Top cultivation talent might not always want to work for a company where finer points can get lost in stretches of greenhouse square footage.

But for some industry veterans, there’s a sense of inevitability, as marijuana stocks proliferate and the industry’s underground culture begins to fade.

Eric Minor, who began growing cannabis in California some 30 years ago and lives around the city of Ukiah, said he’d been trying to strike out on his own to expand a CBD topicals business he runs. But purchasing land was costly. Finding property he could lease, but operate in his own name, proved difficult in Humboldt County.

Humboldt’s mountain farms and hidden grows helped make Northern California the U.S. cannabis industry’s breadbasket for decades. Illegal farms there still get raided by authorities. Increasingly, the people who worked at those farms are turning to larger cannabis companies for work, Minor said.

“Early on, just prior to legalization, you had a lot of resistance,” he said. “But now, the writing’s kind of on the wall. It’s kind of like you have to jump on board or you’re going to sink.”

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