Although the past five weeks have been a rough go for marijuana stocks, the legal cannabis industry has been virtually unstoppable for years. We’ve witnessed Canada become the first industrialized country to legalize recreational marijuana, seen the U.S. Food and Drug Administration approve its very first cannabis-derived drug, and sat back as 33 U.S. states have now given the green light to medical marijuana in some capacity.
Although it will require patience on the part of investors as the nascent legal pot industry matures, marijuana stocks offer the potential of being a once-in-a-generation growth story. The question is, which marijuana stocks should you buy?
While diversifying within the cannabis industry isn’t exactly easy, there are five marijuana stocks that I believe would make up the perfect marijuana portfolio — or, as I prefer to call it, a “pot-folio…”
To begin with, you can’t have a pot-folio without owning at least one cannabis grower. Though there are more than a dozen mid-tier and major growers to choose from, none offers better long-term value at the moment than CannTrust Holdings (NYSE:CTST).
CannTrust has been beaten to its roots of late following a wider-than-expected fourth-quarter loss and a recent shelf offering that involved selling north of 36 million shares at $5.50 apiece, which was almost 15% lower than where the company was trading prior to the capital raise.
But here’s the deal: CannTrust’s cash raise will fund its acquisition of up to 200 acres of land that will be used for 100,000 to 200,000 kilos of outdoor-grown weed. Though some of this cannabis will undoubtedly wind up in dispensary stores, most of it will be processed for derivative production, such as edibles, cannabis-infused beverages, concentrates, and so on. Derivatives are a considerably higher-margin product than traditional dried cannabis, so this is CannTrust’s way of diversifying its product line and ensuring that its margins are among the best in the industry.
The company also intends to grow a combined 100,000 kilos a year via hydroponic grow methods at its flagship Niagara campus and much smaller Vaughan facility. With cheap access to water and electricity, these grow sources should yield per-gram production costs that are lower than the industry average. All told, that’s 200,000 to 300,000 kilos of eventual annual output for the low, low market cap of $737 million.
In addition to Canadian exposure through CannTrust, you’d want a diversified pot-folio to have exposure to the United States’ burgeoning marijuana industry (even if it is illegal at the federal level). That’s where Trulieve Cannabis (NASDAQOTH:TCNNF) comes into play.
Trulieve is a Florida-based vertically integrated cannabis company that controls its product from seed to sale. Since the transport of marijuana isn’t legally allowed outside of state lines by the federal government, it means dispensary operators like Trulieve are usually wise to own their cultivation sites, processing centers, and retail points, so as to save on costs.
What makes Trulieve so special is that, while it does have a presence in California, Connecticut, and Massachusetts, in addition to Florida, it’s really stayed grounded in its home state. Of its 30 open dispensaries, 28 of them are in the Sunshine State, which has allowed Trulieve a commanding market share lead in medical-marijuana-legal Florida.
As the dominant Florida dispensary, Trulieve’s branding has done the talking, and it’s resulted in relatively low operating expenses. In 2019, Trulieve’s sales should more than double to a range of $220 million to $240 million, with $95 million to $105 million in adjusted EBITDA. By 2020, the company foresees sales hitting up to $400 million. Put simply, there’s no profitable pot stock anywhere with a lower forward price-to-earnings ratio than Trulieve Cannabis…
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