The real question is, do you want any cannabis stocks right now, regardless of price?
Of the 38 cannabis companies tracked by cannabis-centric news and information platform New Cannabis Ventures, only two have similar financial characteristics that set them atop the rest of the multi-state operators (MSOs). And only one has what no other does.
But a slew of obstacles is sending investors running away from cannabis stocks, including underwhelming progress in the fight for federal marijuana legalization, a broad spectrum of supply chain issues, inflation, and rising interest rates. The result is a 71% decline in the cannabis stocks for Trulieve Cannabis (TCNNF 2.68%) and Green Thumb Industries (GTBIF 0.50%). So, is now a good time to invest in these two MSO stocks that can be had for under $15 each?
Trulieve and Green Thumb boast two of the top-three first-quarter 2022 revenue totals for tracked cannabis companies. Both also have a market cap above $200 million, positive adjusted operating income for the first quarter of 2022, and sequential quarterly revenue growth. Both would have also had year-over-year quarterly revenue growth, but Green Thumb’s came in flat.
Trulieve beat out Curaleaf for the top spot in Q1 revenue, pulling in $318 million, an increase of 64% year over year, driven by sales from a vast array of products across the landscape of the cannabis market, including flower, edibles, topicals, and nasal sprays, to name a few.
As a result of Trulieve’s acquisition of Harvest Health & Recreation in October last year, Trulieve became the largest cannabis operator in the U.S., boasting facilities in 11 states, with a primary focus in its home state of Florida, where it has 113 of its total 162 dispensaries. The big deal about Florida is that it is currently a medical-use-only state. If that were to change to include recreational use, Trulieve’s current 50% market share would likely place it in the driver’s seat for potentially rapid accelerated revenue growth in the state. However, investors shouldn’t hope for a quick change as the latest bill to legalize recreational marijuana in the state died in committee in March.
With the stock price below $15, one benchmark investors can use for whether or not a stock is priced at a good buy point is insider buying action, specifically from top management team members. Trulieve’s CEO, CFO, and President all bought shares recently, totaling over 31,000 at just under $15. It’s not to say that outside investors should buy the stock just because the people most responsible for a company’s success bought stock, but sometimes insider buying can help bring attention to a stock and signal a good entry point.
What is arguably more important to investors is the outlook for what will drive future revenue growth. The company’s investment in Florida and its hubs in Arizona and Pennsylvania will be a primary focal point of sales. By focusing on a limited number of states, the company could hone in on higher margins, which should support stronger profitability.
Arizona legalized recreational-use marijuana in January 2021 and became the fastest state to generate sales following approval of legalization. In just its first year of legalized recreational use, sales totaled $1.4 billion. Meanwhile, Pennsylvania remains in medical-use-only status, but with the surrounding states of Maryland, New York, and New Jersey all passing legalization bills, it may only be a short matter of time before Pennsylvania does the same. If it does, that could mean the estimated 2 million Keystone State residents who consume cannabis on a regular basis could become Trulieve customers in a recreational capacity. The state’s total cannabis market value is expected to double by 2025, topping $1.2 billion.
In addition, Trulieve has $267 million in cash,, and that should provide further confidence for investors that the company has the funds to either wait for recreational-use legalization in its primary states, or actively look for acquisitions to grow market share if necessary.
2. Green Thumb
Green Thumb offers investors one financial characteristic for the quarter that other MSOs don’t — profit. Green Thumb finished third in revenue, nearly $70 million off of Trulieve, but was the only MSO that posted a net profit — $29 million — which should give investors confidence in the management team’s ability to control expenses and focus on higher-margin products.
As a vertically integrated MSO, Green Thumb sells many of the same products as Trulieve in recreational and medical-use markets. Still, its footprint is slightly larger, generating revenue from its 77 dispensaries across 15 states. If you break down quarterly revenue by dispensary, Green Thumb overtakes Trulieve on a per-store basis, averaging $3 million per store versus $1.96 million per store for Trulieve.
The company has also done a good job of curtailing operating expenses. Although costs are rising as a whole, they are falling as a percent of revenue. In Q1, the company’s SG&A expenses came to 28% of revenue, whereas that number stood at 31% a year ago. This has helped lead to net profit and allowed the company to amass $175 million in cash to support future expansion.
For now, it seems the cannabis market’s success is based on more states coming on board. We may still be a few years away at the earliest from federal legalization. But a major step before federal legalization may be a more attainable Senate vote for the SAFE Banking Act, which prohibits federal regulators from taking action against institutions that provide funding to legitimate cannabis operators and the ancillary businesses that support them.
A Senate vote could come as early as later this year, but depending on how you look at it, some investors may prefer the bill being turned down by the Senate again after passing the House six times. The advantages of such a bill can help all of the MSOs obtain additional funding, but if you’re an investor of a cash-heavy large MSO, watching the smaller players become acquisition targets may be a patient hand you’re willing to play.
If federal legalization does happen, fewer large players like Trulieve and Green Thumb will likely remain to reap the rewards of a long-term strategy. Picking up shares of these two large MSOs under $15 could be a long-term risk well worth taking.