After a surge following the November elections, there are currently 19 states whose citizens have voted to legalize adult-use recreational cannabis. Another 17 states allow medical marijuana use. And according to an April 2021 Pew Research Center Survey, nine-in-ten Americans favor some form of marijuana legalization. As more evidence comes to light refuting its addictive nature or “gateway drug” status, and municipalities realize the tax revenue potential, there is a broadening public and political groundswell to legalize all cannabis sales. So, now the question remains – Which Cannabis Stocks are going to be the best ones to invest in once weed is fully legalized? We found 6 Cannabis Stocks that could show significant growth over the coming years.
Marijuana cultivation, sales and use are still illegal under federal law. When state and federal laws conflict, the Constitution provides the supremacy clause, which basically says you may follow the state law while in that state, but the federal government can choose to stop you. While unusual, this has occurred: certain counties in Nevada have legalized prostitution which is against the federal law. But the federal government chooses not to enforce their law. And as more states join the growing majority, and after removed from the Controlled Substance Act list, de-facto federal legalization, as well as tremendous upside, appears inevitable.
Cannabis stocks will be considered a viable commodity, so as you learn to invest, cannabis stocks can be an excellent opportunity to further diversify your portfolio.
Cannabis is similar to tobacco in how it is cultivated, produced and ingested. The technologies – for growing and consuming – are also comparable. However, as opposed to the health-related issues with nicotine, current research indicates that cannabis does not cause cancer nor is it addictive. In fact, science is demonstrating potential therapeutic benefits associated with marijuana (both THC and CBD) use.
Like alcohol, marijuana is a behavior/mood modifier and can lead to degrees of impairment. Also, as there are different forms of alcohol (beer, wine, spirits) with escalating physiological impacts, there are different strains of cannabis (Sativa, Indica) with varied concentrations of THC, which produces the “high”. While there have been few, if any, reported overdoses associated with marijuana consumption – as opposed to alcohol poisoning deaths – there are a number of possible negative physical reactions both alcohol and cannabis may produce:
Due to this resemblance of cannabis to both tobacco and alcohol, any regulations associated with cannabis legalization will require a hybrid model. This past May, a bill to federally legalize marijuana was introduced in Congress that would remove cannabis from the Controlled Substances Act list and be regulated by both the FDA and the Treasury’s Alcohol and Tobacco Tax and Trade Bureau. These are two distinct agencies with separate agendas.
This potential adverse relationship could create a regulatory vacuum that would be filled by the various states. This could mimic the existing alcohol framework with individual states establishing their own rules and sales taxes amid a broad federal policy and excise tax.
While legalized cannabis will be grown and processed similar to tobacco, the business end – the distribution and selling – will look a lot like the beer and wine industries. Currently, there are a multitude of local, boutique growers and dispensers, akin to craft breweries and small-batch wineries, with their loyal followings. “Tasting rooms” may possibly materialize at cultivation sites, complete with wine club-like subscriptions. However, it will be size and distribution capabilities that will determine the winning companies of legalized marijuana.
With the present cannabis industry disjointed with numerous local producers, the key to growth will be “roll-ups” (no pun intended), where smaller companies are combined with or acquired – rolled into – a continuously growing entity. This consolidation provides the necessary economies of scale and enhanced distribution networks to lower costs and maintain profitability.
This strategy is similar to what has been going on in the beer, wine and alcohol beverage sectors for the last fifty years plus. Industry leaders such as Anheuser-Busch InBev (BUD), Constellation Brands (STZ) and Moet Hennessy Louis Vuitton (LVMHF) continue to grow through acquisitions. The cannabis industry will be no different.
And as legalization becomes more widespread, so too will federal and state-specific regulations increase, creating higher costs and barriers to entry for small, local growers and dispensaries. For marijuana stock investors, size will matter.
It was just a few years ago, that people were riding the “green wave”.
With a focus on size and distribution, our research identified six Cannabis Stocks that appear poised for solid growth as cannabis legalization unfolds:
Canadian-based Canopy Growth (CGC) is one of the largest cannabis stocks with a market capitalization above $9 billion. It was the first federally licensed, regulated and publicly traded cannabis company in North American. CGC sells a wide variety of recreational and medical products. While the company has yet to make a profit, these near-term losses are the result of aggressive investments in global expansion and production combined with COVID-related decreased sales. However, the company has implemented numerous cost cuts and streamlined operations in response.
CGC has an agreement in place to acquire U.S.-based Acreage Holdings once legalization occurs. Also, in 2018 the company partnered with alcohol behemoth Constellation Brands (STZ) to increase production capacity and develop new drinkable cannabis (CBD) products. So far through early 2021, STZ has invested a total of $4 billion into CGC, which equals a 38% stake. Canopy has also acquired a German medical marijuana company and partnered with a Spanish company also to cultivate and distribute medical marijuana.
The combination of global expansion and strategic partnerships with experienced and skilled distribution companies like Constellation places Canopy at the forefront of the cannabis industry.
Also headquartered in Canada, Tilray (TLRY) is one of the largest multinational companies in the industry after its late 2020 merger with Aphria (APHA). While the majority of revenues comes from Canada, the combined company growth will come from leveraging Aphria’s free trade status in Europe and Tilray’s exposure in the United States, both set to see major growth through increased legalizations.
Prior to the Tilray deal, Aphria acquired Sweetwater Brewing company, one of the largest craft breweries in the United States. That purchase has led to a partnership with Anheuser-Busch InBev (BUD) to develop cannabis-infused beverages and CBD products under the Sweetwater label and distributed through BUD.
Similar to CGC, Tilray combines global reach, an aggressive acquisition policy, plus strategic partnerships with an established alcohol distribution channel to maintain a dominant position cultivating and selling cannabis products.
Green Thumb Industries (GTBIF) is a Chicago based company. As cannabis is not yet federally legal in the U.S. Green Thumb listed its stock in Canada in 2018. This Cannabis Stock currently manufactures and distributes a portfolio of consumer-packaged goods in 13 of the 19 states that have legalized recreational use, focusing on limited-license states. This built-in barrier to entry enables the company to expand market share through strategic acquisitions in those states. GTBIF also wholesales their products to other retail stores and dispensaries, saturating their operating markets.
Green Thumb is one of the few cannabis stocks showing a profit. The combination of solid fiscal management, strong balance sheet, aggressive acquisitions and organic growth through a wholesale revenue model provides an effective foundation to achieve greater sales and profitability as more states legalize cannabis.
Located in Massachusetts, Curaleaf (CURA) currently operates in 23 states, offering a wide variety of recreational and medical marijuana products. The company reported record revenues in 1Q21 of $260 million, a 170% growth year-over-year, and on track to $1 billion for the fiscal year. The company expects greater growth as they continue to gain share, especially in the oversized (and recently legalized) New York and New Jersey markets. CURA also continues to innovate and launch new products, including THC and CBD beverage enhancers, utilizing a wholesale revenue model as well.
Out of all the cannabis stocks, Curaleaf has one of the deepest and globally connected management teams in the cannabis field. Besides excellent operational, fiscal management and domestic expansion, the company continues to expand in Europe. In Germany (Europe’s largest marijuana market) they recently acquired EMMAC, Europe’s largest vertically integrated independent cannabis company, and announced a strategic partnership with Italian multinational pharmaceutical company Zambon to develop cannabis neurological therapy products. Also, CURA announced last month another strategic partnership with Rolling Stone magazine to create a new co-branded product line.
A company that would be an attractive acquisition target by one of the aforementioned companies is Trulieve Cannabis (TCNNF). It is the leading medical cannabis company in Florida, with over 50% of the state’s market. A large dispensary network and delivery fleet sells over 500 different cannabis and cannabis-related products. The company is currently building and expanding operations in Massachusetts, Connecticut, Pennsylvania, Maryland, Arizona and California through its recent acquisition of multi-state operator Harvest Health and Recreation.
While product depth and distribution strength in Florida by themselves position TCNNF as an attractive takeover target, its financial management and profitability set it apart. In May, Trulieve reported their 13th consecutive profitable quarter, which is unique in the cannabis world. With a growth rate of 15%, a gross margin of 70% and positive cash flow of $60 million from operations – not including any revenues from Harvest – and an established plan for expansion, TCNNF would make a strategic fit for a number of cannabis companies.
Like tobacco, marijuana needs to be grown. However, unlike tobacco and due to technology, it can be cultivated in a variety of places, such as farmland or warehouses. But it still has to grow somewhere. Another way to play the national legalization is through the property where cannabis is harvested. Innovative Industrial Properties (IIPR) is a Real Estate Investment Trust (REIT) that specializes in selling and leasing properties to cannabis growers. They also act as financier through a sale-leaseback arrangement that frees capital for expansion and growth. And focusing primarily on medical marijuana companies and facilities, IIPR can participate in one of the largest growth industries for the near future.
As of 2021, IIPR owns over 2.4 million square feet of rentable land or warehouses in 18 states and are nearly 100% leased at any time. This indicates an effective operating plan and a unique lead position in an industry with growing demands for cultivation locations.
In Summary
Cannabis legalization is inevitable. And once legal, marijuana industry sales growth will be sizable. It will be those companies with scale to manage costs, access to capital to fuel acquisitions, and established distribution networks to market a retail product that will flourish.
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