With a growing acceptance of cannabis for medicinal and recreational use across the U.S., many new companies have launched over the past two years. What used to be small, undercover operations to supply an illegal product has turned into a flourishing industry. Big money is at stake for both companies and investors, racing to capture this huge, untapped market.
So, which companies are showing the most potential for investors in 2020?
The answer lies in looking at companies that service the U.S. market. Over 50% of cannabis sales worldwide are expected to be frim the United States by 2024. In 2019, the cannabis market in the U.S. was valued at $12.5 billion. Various estimates put the U.S. market at $25-30 billion in 2023 and $75 billion within a 10-year period.
So, I did an analysis of all 20 cannabis companies in the American Cannabis Operator index. Analyzing early-stage companies is always a tricky proposition. The companies winning the race right now aren’t necessarily the same companies that will win the over the long-term. Still, there were excellent clues as to which companies are showing the most promise. Here is what I learned…
Without doing exhaustive research on all 20 companies, I based my analysis on two factors: financial data (sales and profits) and company size. In terms of size, I looked at number of employees, size of the market they served, and number of products and services offered.
The results were interesting. As might be expected, most of the companies in the index are small and spending money faster than a celebrity’s teen-age daughter. This is typical for companies ramping up to capture a growing market. But a few companies really stood out.
Trulieve Cannabis Corporation
The first company to break the mold is Trulieve Cannabis (CSE: TRUL) (OTCQX: TCNNF). Based in Quincy, Florida, Trulieve has 2900 employees and a market cap of $1.2 billion. Most of the companies in the index were tiny by comparison: 10-200 employees with a market cap of $10-200 million. They have 170 products, 43 dispensaries in Florida, and they do home delivery. They serve customers in California, Florida, Connecticut and Massachusetts and have about 50% of the Florida medical cannabis market.
Financials for Trulieve look strong as well. Sales doubled from 2018 to the present (past 12 months): $102 million to $209 million. And here’s something I always like to see in an investment: the company is making a profit – and profits are growing fast. Profits have tripled since 2018: $43 million in 2018 to $143 million (past 12 months). Meanwhile, the stock is priced at a very reasonable trailing P/E ratio of 8.
Liberty Health Sciences, Inc.
Next is Liberty Health Sciences (CSE: LHS) (OTCQX: LHSIF). Also based in Florida, Liberty provides medical cannabis mainly within the state with 21 dispensaries across Florida. They are much smaller than Trulieve with 220 employees and a market cap of just $170 million.
Investors don’t seem to have noticed that they became profitable during the 3rd quarter of 2019. Since then, both sales and profits are growing at a fast and steady rate. The stock price is starting to reflect that. Shares have doubled over the past six months, now at $0.50 per share.
Green Thumb Industries, Inc.
My third choice is Green Thumb Industries (CSE: GTII) (OTCQX: GTBIF). Based in Chicago, they have 1,300 employees. In terms of market cap, they are the biggest of the three at $1.8 billion. They have 40 retail stores and licenses for 96 locations across 12 U.S. markets. The company was founded in 2014, so they have about a 4-year head start compared to most other companies in the industry.
Sales are growing fast, climbing from $62 million to $161 million (past 12 months). Losses, however, have increased from $8 million to $52 million. That puts Green Thumb in the wait-and-see category, rather than looks-good-now. The stock, which had been in a downtrend, has now leveled out in the $8-10 range over the last six months.
You can do your own analysis and buy the best stocks in the industry. However, there is another way to play this: you could buy a little of each stock in equal dollar amounts. Undoubtedly, the money you lose on the companies that go belly-up will more than be offset by the winners. After all, there will be several winners in the coming years as the market develops.
Article By: Gregg Killpack