The cannabis sector is simply blooming with enthusiasm right now (pun certainly intended). Anticipation of Federal legalization during Biden’s presidency has hit an all-time high. Accordingly, marijuana stocks have taken off in dramatic fashion.
Investors are getting high on the idea that Multi-State Operators (MSOs) will be able to nationally integrate their business models and grow faster. State-by-State regulations are an ongoing headwind investors are hoping will be smoothed out sooner rather than later.
Indeed, the timing of legalization will play a big role in how cannabis stocks perform over the medium-term. But in the short-term, this sector is one with tons of bullish movement, and understandably a favorite among momentum traders today.
Here are the top 7 marijuana stocks investors should think about today:
- Curaleaf (OTCMKTS:CURLF)
- Cresco Labs (OTCMKTS:CRLBF)
- Green Thumb Industries (OTCMKTS:GTBIF)
- Trulieve Cannabis (OTCMKTS:TCNNF)
- Columbia Care (OTCMKTS:CCHWF)
- Village Farms (NASDAQ:VFF)
- GrowGeneration (NASDAQ:GRWG)
These stocks have tremendous potential to outperform this summer. Readers will note that most of these companies are U.S.-based MSOs, rather than Canadian cannabis companies with little access to U.S. markets right now. That said, there are a couple Canadian players I think have a shot.
Marijuana Stocks: Curaleaf (CURLF)
Hands-down, my top pick in the cannabis sector right now is Curaleaf. Partly due to organic growth and partly due to the acquisition of Grassroots last year, Curaleaf has become the largest player in the U.S. cannabis market today.
This company isn’t just the largest cannabis player in the U.S. market; it’s also got the best business model. The company’s vertically-integrated operations span coast-to-coast, and those operations are key to the ownership thesis for CURLF stock.
Curaleaf has operations in 23 states, and is expanding to newly-legalized states as they open for business. Additionally, Curaleaf’s 23 cultivation facilities, more than 30 processing facilities and network of over 1,150 wholesale dispensaries provide the potential for value capture along its supply chain in a way few competitors are set up for.
The cannabis business remains low-margin at the upstream levels, with expanding margins as companies move further and further downstream. Curaleaf’s vertically-integrated operations set the company up to be as high-margin as a producer can be in this space.
With the race to profitability likely to heat up as investors (eventually) demand bottom line results, Curaleaf has the staying power to be a long-term holding in investor portfolios today.
Cresco Labs (CRLBF)
Another U.S. MSO with an impressive footprint is Cresco.
Cresco’s footprint isn’t nearly as large as that of Curaleaf, but CRLBF does boast coverage in 7 states at the moment. More importantly, those 7 states are some of the largest in terms of population size and market opportunity.
In other words, Cresco is a big game hunter that has already set up shop in the markets it wants to dominate. For investors, that’s a great thing, as market share in these core regions will undoubtedly be subject to intense competition once the starting pistol is fired.
Similar to Curaleaf, Cresco has experienced tremendous organic growth supplemented by acquisitions. The company’s recent acquisition of Bluma Wellness (OTCMKTS:BMWLF) for $213 million provided an instant boost for its market share.
Cresco trades at just under 10-times forward sales. For the present market, that’s not very expensive. In fact, this company is one of the better value plays for long-term investors seeking MSO exposure. The company’s growth potential could ultimately justify its present valuation.
Green Thumb Industries (GTBIF)
Green Thumb is another MSO with a relatively large market cap, around $7.4 billion at the time of writing.
The company’s focus is again on large markets, with attention centered on Illinois and Pennsylvania. Green Thumb’s early-mover advantage in these states could bode well for the company as its competes with aggressive competition.
Green Thumb has more than 50 retail locations across 10 states. While that’s certainly below the coverage other large MSOs have, in the grand scheme of things Green Thumb is still a major player. The company has been able to grow at scale and improve its margins, and its financials look a lot better now than they have in the past.
Green Thumb recently posted its first quarter of positive net income in Q3 of 2020, bolstered by 131% year-over-year revenue growth. This company is now a positive cash flow generator for long-term investors seeking fundamentally-sound options in the cannabis space.
I like companies that make money and Green Thumb looks well-positioned to continue growing both the top and bottom lines moving forward. One of the main drivers of margin outperformance is the fact that two-thirds of the company’s sales are value-added products such as vapes, concentrates and edibles.
The potential of cannabis legalization is a great catalyst investors should have their eyes on. For the time being, focusing on companies with profitable and sustainable business models remains the best way to approach this sector from a risk management perspective.
Trulieve Cannabis (TCNNF)
Trulieve is a more concentrated MSO play on the Florida market. More than 90% of the company’s dispensaries are located in Florida, a key battleground state for not only politics, but cannabis too.
The company’s strategy of singling out one specific market it wants to target can be viewed two ways.
On one hand, most cannabis companies are in a “grow at any cost” stage. Many MSOs are trying to gain a foothold in every market possible, aiming to be the biggest and baddest in any market. Investors want to see growth, and aren’t dissuaded by bottom line underperformance right now.
There’s a whole generation of retail investors we’ve recently found out are willing to “YOLO” their life insurance money on stocks they see as having parabolic growth potential. Of course, this sort of situation is what many would call irrational, but that’s the way it is.
On the other hand, you’ve got investors who like targeted, regional players. Sometimes being excellent in one market is much better than being average in many.
I’m in the latter camp, at least with respect to Trulieve’s performance. This company actually trades at a reasonable valuation multiple. You heard that right. A cannabis producer trading at 42-times forward earnings?
Yup. Trulieve is one of the best marijuana stocks available on an EPS basis right now. I like companies that make money and Trulieve fits the bill.
Columbia Care (CCHWF)
Columbia Care got its start in the medical marijuana space, but has recently begun branching into recreational cannabis. This MSO has pretty decent coverage across 18 states, and is another player well-positioned to take advantage of Federal legalization.
The company’s financials look okay. Year-over-year revenue growth of 234% this past quarter is extremely impressive, but Columbia’s bottom line leaves much to be desired.
Columbia’s been combatting this bottom line weakness with equity raises, and a strategic approach to grow its way out of the hole. The company’s recent acquisition of Green Leaf Medical is one it hopes will provide the synergies it promised investors.
What’s interesting about Columbia Care is that the company has actually released forward projections for 2021. I think this is partly due to the fact that acquisition costs obfuscate financial results. There are a ton of shares being issued as a result of this merger, so investors need to keep that in mind as well. However, the combined entity is expected to churn out $500 to $530 million in revenue at a gross margin of 47%.
Village Farms (VFF)
Village Farms is an interesting hybrid play on the cannabis sector, with operations in both Canada and the U.S. This is obviously bullish for investors considering the impacts legalization will ultimately have on the individual players. Village Farms has large-scale greenhouses in both British Columbia and Texas. These markets are likely to remain key battleground areas for the company to continue growing market share.
The company’s Canadian operations range from dry flower to higher-margin items such as pre-rolls, vapes and edibles. In the U.S., the company grows and sells CBD products across the country. Another reason this is a hybrid play is that the company grows more than just cannabis and CBD products — it grows vegetables too.
Texas operations position the company well for Federal cannabis legalization. While the company’s only focused on CBD sales currently, Village Farms has a plan in place to convert to full-scale cannabis production when the time comes.
Another reason I like Village Farms: its hybrid model is profitable. The company has actually turned out sequential profitable quarters and appears well on track to having a sustainable business model as is. The company’s hasn’t sacrificed growth in the chase for profitability either. Indeed, net sales increased 75% quarter-over-quarter.
As far as fundamentally-sound cannabis producers go, Village Farms is about as good as it gets. VFF stock is well-positioned to outperform its peers this summer.
GrowGeneration (GRWG)
As far as marijuana stocks go, GrowGeneration is a bit of a deviation from the list. That’s because this company doesn’t grow marijuana, but rather provides the supplies for growers to do so.
GrowGeneration focuses on hydroponics, with the largest chain of hydroponic garden centers in North America. The company sells everything large-scale (and small-time) producers need to grow cannabis.
As this is more of a “picks and shovels” play on the cannabis sector, investors have gifted GrowGeneration a very lucrative valuation multiple.
With a current $2.8 billion market cap on TTM revenues of $157 million, the company’s price-to-sales multiple hovers around 18 — certainly not cheap.
That said, this company is executing well. Its fourth quarter earnings beat and 140% revenue growth rate are enough to make investors smile. The cannabis sector is overvalued right now on the basis of some pretty outlandish growth expectations. However, GrowGeneration’s relatively high-margin business is enticing when compared to the growth expected in this sector.
GrowGeneration is a less-risky bet in this sector relative to many producers right now. The cannabis space is highly competitive, and it remains a nascent industry. Those that don’t get acquired or grow to become one of the larger players will likely die out. However, no matter who’s left standing at the end of the day, they’ll need growing supplies. And GrowGeneration will be there to provide them.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article.
