Cannabis stocks are not all created equal.
Limited moats, heavy governmental taxation and fierce black market competition mean it’s difficult for these companies to generate profits.
As this young industry matures, certain companies are emerging as potential best of breed.
Today, I want to present the stocks I believe may become market leaders over the next decade.
Aphria is the #1 cannabis stock to buy this year and this may come as a surprise considering past events.
In 2018, Hindenburg Research released a report accusing the company of being “part of a scheme orchestrated by a network of insiders to divert funds away from shareholders into their own pockets“. Serious conflicts of interest were uncovered and the CEO was forced to resign.
Two years later, Aphria has made tremendous progress:
- It has a licensed annual flower production capacity of 255,000 kg
- Its flower production costs are less than $1/gram.
- It entered a distribution agreement to supply medical cannabis products to Shopper’s Drug Mart, a Canadian pharmacy chain whose 1300 retail locations cover 99% of the Canadian market
- It signed an agreement making Great North Distributors its exclusive cannabis representative throughout Canada, giving Aphria 100% coverage of all cannabis retailers
- It boasts a strong international presence:
- In Europe via its German subsidiary CC Pharma, who distributes pharmaceutical products, including medical cannabis, to over 13,000 pharmacies in Germany and throughout Europe
- In Latin America via ABP S.A. its wholly-owned subsidiary based in Argentina. Aphria provides products and monitoring kits to help with medical cannabis resaearch in Argentinian hospitals, with great success so far (side note: Brazil, who recently approved medical marijuana sales, is a potentially massive market)
- In Australia by supplying Althea, a medical marijuana company who reached 4,000 patients in 2019. The supply agreement runs through 2027.
- Its products won 7 Canadian Canabis awards in 2019
- It owns Broken Coast, a Vancouver-based grower who won Top Master Grower and Top Hybrid Flower at the 2019 Canadian Cannabis Awards
These achievements generate strong financial performances:
- 2019 revenues of $237M are up 1060% from $20.4M in 2016
- Q1 2020 EBITDA is positive $23.8M
- Q1 2020 Net Income is positive $5.6M
- It has more than $370M of cash and cash equivalents on its Balance Sheet
In sum, Aphria boasts impressive production capacity, low production costs, quality products, a strong international presence and, most importantly, positive financial results. Profitability is rare in the marijuana space and Aphria stand out as one the highest quality companies in the entire industry.
My second favorite marijuana stock is neither a cannabis producer nor a retailer.
It’s a landlord.
Innovative Industrial Properties (NYSE: IIPR) is a REIT focused on the acquisition, ownership and management of specialized industrial properties leased to experienced, state-licensed operators for their regulated medical-use cannabis facilities.
IIPR owns 53 properties, which have a 99% occupancy rate and a weighted-average remaining lease term of approximately 15.3 years. All properties are leased on a triple-net basis so the tenants are responsible for all costs, including structural repairs, maintenance, taxes and insurance.
Like any self-respecting REIT, IIPR is growing by investing in real estate. In the first three months of 2020, it acquired 7 properties with 765,000 rentable square feet, for a total price of $73M. In the past three months, IIPR has continued buying up properties:
- On June 10th, IIPR acquired Pennsylvania Properties for $8.9M, which is is leasing on a triple-net basis to Holistic Industries
- On July 1st, IIPR purchased Massachussets Property for $7.8M, which it is leasing on triple-net basis to a subsidiary of Cresco Labs.
- In Michigan, IIPR is adding $17M in improvements to a 115,000 square foot property
- In Ohio, $13.5M is added in improvements to a 50,000 square foot property.
How is IIPR funding these investments?
By issuing shares of its common stock: In January, IIPR raised $258.7M from a stock offering and the stock price continues to rise despite shareholder dilution. Indeed, institutions are gobbling up the stock and they now own more than 70% of the company’s shares. Major shareholders include BlackRock (14%), The Vanguard Group (11%), Zimmer Partners (5%), BMO Asset Management (2.5%), and Northern Trust Investments (1.59%), among others.
Institutional ownership is a very strong indicator that a company has the potential to generate significant shareholder value in coming years.
Judging by Q1 2020 results, IIPR’s Y/Y financials are indeed very strong:
- Q1 2020 rental revenues of $21.1M are up 213% from $6.8M in Q1 2019.
- Adjusted Funds From Operations (AFFO) of $17.7M are up 235% from $5.2M
- Net Income of $11.5M is up 252% from $3.3M.
- EPS of $0.72 is up 118%, from $0.33.
Cherry on the cake? The stock has a dividend yield of 4.5%.
Although still in its early days, this REIT is already performing strongly and the spread of legalization throughout the USA further strengthens the long term bull case.
My third choice is slightly more controversial.
Canopy Growth (NYSE: CGC) is a Canadian cannabis company which operates retail stores under the Tweed and Tokyo Smoke banners. Spectrum Therapeutics, its medical division, conducts clinical research and sells a range of products.
Canopy is often associated with overhype and crushing disappointment, with good reason:
- The good news is that 2016-2020 revenues increased 925%
- The bad news is that Operating Expenses increased 2086% over the same period, and
- EPS plunged from -0.38 in 2018 to -2.76 in 2019 to -3.80 in 2020.
Any sane person would close the Yahoo Finance tab and move on to another stock but I think Canopy has plenty to offer risk-tolerant investors with a long term focus.
For starters, it’s the world’s largest cannabis company: Its employs 3,000 workers, has annual sales of more than $400M and operations in more than a dozen countries.
Second, Canopy is arguably the largest producer as it operates “eleven licensed cannabis production sites with over 7.5 million square feet of production capacity, including over one million square feet of GMP certified production space“. Its production capacities result in significant economies or scale, and its flower production costs are under $0.90/gram, which is the lowest of all the major cannabis companies.
Third, Fortune 500 heavyweight Constellation Brands Inc owns controls 38.5% of the company. This is a significant advantage over its competitors because Constellation has deep pockets and extensive experience in branding and marketing consumer products. Look at Constellation Brands’ growth since 2000. Canopy could well be the cannabis industry’s next success story.
Fourth, Canopy established key partnerships with celebrities and various industry leaders to build brand recognition. In this regards, it is way ahead of its competitors:
- It distributes Snoop Dogg’s LBS (formerly Leafs By Snoop) products, which a recent study found to be the most recognized cannabis brand
- It acquired a 25% stake in Houseplant, Seth Rogan’s company
- It issued shares of More Life Growth, a previously wholly-owned subsidiary, to entities controlled by Canadian rapper Drake.
- It is working with Martha Stewart to develop cannabis et care, cosmetics and food
- It has established a partnership with breeding brand DNA Genetics, which gives Canopy access to a wealth of unique, genetically-diverse cannabis strains that it can incorporate into its product lines.
Lastly, Canopy is restructuring to adapt operations with expected demand. The company recently announced the shuttering of 3 million square feet of greenhouses and the layoff of 500 employees. This will significantly reduce costs and hopefully accelerate the path to profitability.
If you have a long term outlook and have faith the cannabis industry will grow, then Canopy Growth may be a wise investment. It’s almost too big to fail at this point.
My fourth pick is Cronos Group (Nasdaq: CRON), a Canadian company headquartered in Toronto, Ontario, with international production and distribution across five continents.
For now, Cronos’ most valuable asset is the corporate backing of Altria, the tobacco behemoth who owns Marlboro and Philip Morris. In December 2018, Altria invested $1.8bn to acquire a 45% stake in Cronos. This acquisition helps Altria diversify away from tobacco and provides Cronos with much needed corporate experience to help with product development and marketing.
Altria’s backing is useful on many fronts. First, it has a vast network of tobacco growers at its disposal so it’s not farfetched to assume that some of these growers may one day convert to growing cannabis as worldwide demand increases. Second, Cronos will also benefit from Altria’s vast distribution network: In the USA alone, Altria has access to more than 250,000 point of sales through convenience stores and this could prove crucial when it comes to distributing Cronos’ CBD products.
Thanks to Altria’s investment, Cronos has more than $1.1 billion of cash on hand. This cash allows Cronos to invest and R&D and weather the vaping bans. So far, Cronos financial results are modest but still encouraging: Q1 2020 revenues of $9.3M are up 175% from $3.3M in Q1 2019. This growth is largely due to the recent acquisition of Redwood, a U.S. based company who operates under the Lord Jones brand name. Redwoods provides Cronos with access to the US market, which will considerably boost sales in coming years.
Lastly, Cronos boasts a significant international presence, with controlling interests in companies operating in Colombia, Israel, Australia, Germany and Poland. Cronos’ early entry in these markets means it is well positioned to take advantage of the progressive legalization laws.
My fifth choice is one of my favorites.
This company does not produce or sell cannabis. It sells products to help you grow your own.
Grow Generation Corp (Nasdaq: GRWG) is a full-service product and solution offering for growers and cultivators. Simply put, it’s a specialty garden center for marijuana growers: it sells hydroponic products such as organic nutrients, soils and advanced lighting technology.
As of July 2020, Grow Generation operates 27 stores in 10 states and has the ambition of becoming the “Home Depot” of marijuana. That’s a bold statement, but the company’s fundamentals and performance suggest it may happen.
As mentioned in my article analyzing the marijuana industry, legalization is spreading worldwide and home growing, which used to be a clandestine activity, will become mainstream. In 2016, 18% of adults said they would grow their own marijuana if legal and 40% of Millennials said they’d give it a go. A recent article in the Chicago Tribune reveals that some medical marijuana patients are growing their own plants due to shortages in supply. Lastly, plenty of people who enjoy the pleasures of gardening will continue growing their own and others, who simply want to save money, will try it.
Grow Generation’s strength lies in its ability to sell specialty consumable products, which it claims represent 60% of its revenues. The hydroponic equipment is an expensive, one time purchase, so it’s the regular sales of nutrients, additives, growing media and environmental controls which drive repeat purchases and foot traffic.
So far, the business model is successful: Grow Generation’s revenues reached $79.7M in 2019, a 908% increase from $7.9M in 2016. Although the company is still in the early growth stages, it reported positive Net Income and Normalized EBITDA for the first time in 2019. This suggests the company is starting to rationalize its growth.
Even better, Grow Generation is expanding and opening new locations through acquisitions. It acquired $30M worth of stores in 2019, $12M so far in 2020 and project to open 13 new locations in 2020-2021.
In sum, the spread of legalization, the company’s strong financial performances and aggressive acquisition strategy suggest a promising future lies ahead.
The legal marijuana market is not all about recreational use. The medical sector represents rougly 40% of all cannabis retail sales in the US and is expected to grow 57% by 2024. In Germany, €123M worth of insurance-reimbursed cannabis was sold in 2019; in Italy, medical cannabis sales grew 50% in 2019. Companies specialized in selling and developing cannabis-based medicine have a bright future ahead of them.
GW Pharmaceuticals (Nasdaq: GWPH) is a British pharmaceutical company known for its multiple sclerosis treatment product nabiximols, which was the first natural cannabis plant derivative to gain market approval in any country. Another cannabis-based product, Epidiolex, was approved for treatment of epilepsy by the US Food and Drug Administration in 2018.
The FDA approval of Epidiolex, a drug which treats seizures for patients 2 years or older, resulted in its launch on the US market on November 1st, 2018. Entering the US market caused GW Pharma’s revenues to skyrocket from a mere $12M in 2018 to well over $300M in 2019. FY 2020 sales should be even better, as Q1 2020 earnings show net sales of $116M, so 2020 revenues may exceed $400M. The drug is also being rolled out across the Europe and Epidiolex already boasts a 15% market share of all insurance-covered medical cannabis sales in Germany.
In addition, GW Pharma is preparing Sativex (or Nabiximols) for the US market. Sativex is a “complex botanical medicine formulated from extracts of the cannabis sativa plant” used to treat multiple sclerosis. There is a big market for this drug as an estimated 25%-50% of multiple sclerosis patients are currently self-medicating with marijuana so the company estimates the market potential to be in excess of $400M. The drug is currently in Phase 3 trials so commercialization may occur by mid to late 2021. When that happens, GW Pharma’s revenues may breach the $1 billion mark.
With $500M in cash on its Balance Sheet and Epidiolex revenues rolling in, there is plenty of liquidity available to finance R&D. Net Income and EBITDA are still negative and FY 2020 guidance suggest they will remain so for the next year, at minimum. However, if all the expected drugs hit the market within the next few years then GW Pharma will eventualy start generating some serious profits.
Patient investors should seriously consider purchasing shares before the stock really takes off.
4 Honorable Mentions
HEXO (NYSE: HEXO) is a Canadian cannabis company headquarted in Quebec, which has over 800,000 square feet of production capacity and an annual output of 85 tons. HEXO controls 33% of Quebec’s legal cannabis market, which is significant because it’s the second most populated province in Canada. In 2019, HEXO launched Original Stash, an affordable cannabis and haschisch line meant to compete with low-cost black market product. This is a shrewd strategy that may pay off if the quality meets expectations. Lastly, it’s worth mentioning that HEXO and Molson Coors Light established Truss CBD USA, a joint-venture standalone company which will develop non-alcohol hemp-derived CBD beverages in Colorado. Molson’s money and vast experience in the beverages industry will prove to be an invaluable asset and it’s logical to assume that companies with corporate backing will have a greater chance of succeeding than companies who don’t.
In the world of underperforming cannabis stocks, Trulieve Cannabis Corp (OTCMKTS: TCNNF) is somewhat of an anomaly. Investors who purchased the stock in July 2019 are sitting on a pretty 55% gain. How is this possible? Trulieve is a vertically integrated company who produces and sells its own products, so it’s able to control its costs better than retailers who buy from suppliers. Contrary to many cannabis companies, Trulieve is profitable: Q1 2020 revenues of $96M, Net Income of $13.9M and $100M of cash and cash equivalents on hand make a strong bull case. In addition, Truelieve is heavily invested in the Florida medical marijuana market, where it has more than 20 dispensaries. Florida is one the US retirees’ favorite states, which explains why the medical market could generate upwards of $1 billion this year. Lastly, there are persistent rumors that Florida will legalize recreational use in 2022. When that happens, Trulieve already has the dispensaries to sell legal products to consumers with significant purchasing power.
Headquartered in Chicago, Illinois, Green Thumb Industries (OTCMKTS: GTBIF) manufactures and distributes branded cannabis products. It employs 3,000 people, has 13 manufacturing facilities, 96 retail locations and operations across 12 U.S. states. In addition to selling cannabis flower, it also sells vape pens, CBD skin care products, edibles, and concentrates, among others. In 2019, Green Thumb sold $216M worth of products, a 246% increase from 2018, and it currently has $71M of cash on its Balance Sheet. Green Thumb is not yet profitable but its Q1 2020 Net Loss of -$4.2M is down 55.7% from -$9.5M in Q1 2019. This year could be make or break for many marijuana stocks, but Green Thumb appears well positioned to survive the challenging context.
Curaleaf Holdings Inc (OTCMKTS: CURLF) is a vertically integrated cannabis company with operations in 23 US states. It operates 2.2M square feet of cultivation capacity spread over 15 cultivation sites, 30 processing sites, 88 retail locations, and distributes its products to more than 1150 dispensaries throughout the USA. Its medical marijuana division has served 180K+ registered patients and generated $21.7M of revenues in March 2020, compared to $10.9M in March 2019. Curaleaf’s external growth strategy has resulted in the acquisition of 12 businesses since 2018. In 2019, it spent $96M on maintenance and expansion. In 2020, Curaleaf has already finalized the acquisition of Select, a wholesaler who sells products in over 900 retail locations, and the 3 Arrow Alternative Care (AAC) dispensary in Connecticut. Curaleaf is not yet profitable but it sold $96M of products in Q1 2020 and has a cool $176M of cash on its Balance Sheet.
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DISCLAIMER: This article is the fruit of my personal research and should not be considered financial advice. I enjoy analyzing stocks and providing investment ideas but I highly encourage you to conduct your own research before investing in any asset. NEVER invest without having done proper due diligence and NEVER invest out of the Fear Of Missing Out (FOMO). Also, NEVER invest because some internet message boards are hyping up a high-flying stock. As a rule of thumb, the number of rockets included in a tweet are inversely proportional to the quality of the advice given.