Analyst Read: Cannabis Stocks

Leafing through the hype.
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We’ve been getting a number of questions about cannabis stocks, so let’s leaf through the industry.

In the United States, cannabis is federally illegal for any purpose, however 35 states have legalized medical marijuana and 15 states (AK, AZ, CA, CO, IL, ME, MT, NV, NJ, OR, SD, VT, WA) have legalized recreational marijuana. This is in conflict with the federal laws that categorize cannabis as a Schedule 1 drug, but individuals complying with state medical cannabis laws cannot be federally prosecuted and enforcement has generally been left to the states. 

But in reality, cannabis companies still do not have true access to the banking system or capital because of the federal prohibitions, which causes a sticky situation for the industry. Cannabis companies are operating within legalized states (many operating in cash and armed guards) and a large black market still exists even in states like California. 

Because of this dynamic, many of the publicly traded cannabis stocks are based and listed in Canada, where cannabis is fully legal. There are some public US businesses that have made investments in these budding Canadian companies, such as Altria ($MO) investing in Cronos, Constellation ($STZ) investing in Canopy, and Anheuser Busch InBev ($BUD) investing in Tilray. 

The popular pure-play cannabis stocks are trading based on preemptive positioning to capture a huge U.S. market once it opens up. To be clear, in order for these to be worth investing in, the U.S. market needs to open up and they need to be market share gainers when that happens.

Unprofitable companies

  • Canopy Growth ($CGC) – $9.0bn Market Cap: Canopy Growth is the world’s largest cannabis company. At $24.25 USD per share, $CGC is trading at a crazy valuation that doesn’t make sense based on projected financials (55x forward Gross Profit). It’s also very unprofitable. But they are aggressively positioning themselves for the U.S. market, having purchased stakes in NY-based Acreage Holdings (ACRG-AU.CN) and multi-state operator TerrAscent (TER.CN). 
  • Aurora Cannabis ($ACB) – $1.2bn Market Cap: Aurora is the second largest Canadian cannabis producer, going through some rocky management changes. At $7.66 USD per share, $ACB is trading at a relatively reasonable 11.0x forward Gross Profit, but is also smaller and has lower growth than Canopy. It is also unprofitable.
  • Tilray ($TLRY) – $1.2bn Market Cap: Tilray is a Canadian cannabis company with a $100 million joint-venture with ABInBev and does a lot with medical cannabis. At $8.04 USD per share values the company at 12x forward Gross Profit, and the company has high growth but is also very unprofitable.
  • Cronos ($CRON) – $2.5bn Market Cap: Cronos is unprofitable and trading for insane (unreadable) multiples. But they have the backing of Altria, which is interesting.

Profitable companies

  • Curaleaf Holdings (CURA.CN) – $5.6bn Market Cap: Curaleaf is an American company and the second biggest by revenue, that produces and dispenses cannabis in 23 states. At $13.70 CAD per share, this one is actually trading at a reasonable valuation. Curaleaf is actually profitable and trades at 14.5x forward EBITDA and is expected to have very strong growth. This might be my favorite cannabis stock from first glance.
  • Green Thumb (GTII:CN) – $4.9bn Market Cap: This is a US packaged goods and retailer that has been on a tear. It reported great earnings, and is trading for about 20x forward EBITDA. I like this one as well.
  • Trulieve Cannabis (TRUL:CN) – $2.9bn Market Cap: Trulieve is the dominant dispensary chain in Florida. At $34.45 CAD, they’re trading for 9.6x forward EBITDA, which is lower because they are only a retailer. Still, 50% EBITDA margins are nothing to scoff at.
  • Aphria ($APHA) – $1.6bn Market Cap: Aphria is a Canadian producer and seller. At $5.55 USD per share, this profitable company looks like Curaleaf and is trading at around 20x forward EBITDA. 

In general, the unprofitable cannabis stocks are a call option on U.S. legalization and expansion. Unless you have a clear view on national legalization in the U.S., they’re hard to justify owning right now.

From initial research, I’d prefer to own a few of the profitable companies at a valuation I can wrap my head around. That largely means the American ones like Curaleaf, Green Thumb, and Trulieve. They are profitable, growing, and not stratospherically priced, which means they can provide great returns outside of national legalization news. I will add these for consideration as a Growth Stock add to the ROIC Big Board.

In the long-term, the fight for market share will be a brutal knife fight, with certain companies dominating others. But I imagine they all will pop when national legalization gets announced, so holding the profitable ones seems safer to me.

For what it’s worth, I’m more bullish on this “emerging legalization” sector than I am the mobile sports-betting and gambling one, especially when thinking about the future return-from-home environment.

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  1. Can you look into Cleaver Leaves which is doing a spaq merger. Ticker symbol SAMA. They are a grower of cannabis in south america, and do to the weather there, they are able to grow year round and at a fraction of the cost when compared to other growers around the world. They are also growing to be one of the biggest growers around the world. Also one fact that makes me think they are real is that they are the only cannabis company in Latin America, to be granted a European Union-Good Manufacturing Practice certification for extracts. There CEO was also a principal at The Blackstone Group.

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