Canadian cannabis stocks continue to remain volatile in 2021. These stocks have grossly underperformed the broader markets in the last two and a half years. Pot stocks on the TSX have been grappling with a variety of structural issues. These include slower than expected rollout of cannabis stores in large Canadian provinces, cannibalization from a thriving black market as well as an increase in competition.
So, for the last several quarter's Canadian marijuana producers have reported widening losses, high inventory levels, and multi-million-dollar write-downs. Companies such as Aurora Cannabis and Sundial Growers have diluted shareholder wealth at an alarming rate as the pot heavyweights continue to raise equity capital to offset negative profit margins and cash burn.
However, there are a few cannabis producers south of the border that are exceeding Wall Street expectations, thereby managing to crush the index returns in the last few years. There is a good chance that marijuana will be legalized in the U.S. at the federal level making it the largest legal cannabis market in the world.
Here, we take a look at three marijuana stocks that have operations in the U.S., are profitable, and should be considered by Canadian investors.
Green Thumb Industries
Valued at a market cap of $6.26 billion, Green Thumb Industries has returned 384% in the last five years. Despite its stellar gains, the stock is down 27% from its 52-week high giving investors an opportunity to buy the dip.
In April, Virginia became the 16th U.S. state to legalize marijuana although recreational sales will begin only in 2024. The state has offered five licenses to vertically integrated medical marijuana producers to grow, process, and distribute products directly to customers.
Green Thumb raised $217 million in debt capital and soon disclosed the acquisition of Dharma Pharmaceuticals, a medical cannabis company with a strong presence in Virginia. This acquisition will equip Green Thumb with one of the five licenses required to operate in the state as well as access to a production facility and an already existing customer base.
In 2020, Green Thumb Industries reported sales of $556 million, an increase of 157% year over year. It also reported adjusted earnings per share of $0.07 compared to a loss of $0.31 per share in 2019.
In Q4 of 2020, Green Thumb sales were up 134% year over year. The company has now reported four consecutive quarters of operating leverage and a GAAP net income in the last two quarters of 2020.
Wall Street expects Green Thumb to increase sales by 57.2% to $875 million in 2021 and by 32.8% to $1.16 billion in 2022. This will allow it to increase earnings per share from $0.07 in 2020 to $0.7 per share in 2022.
We can see Green Thumb stock is trading at a forward price to sales multiple of 7.24x and a price to earnings multiple of 78x which might look steep. But investors should also note that growth stocks trade at a premium and Green Thumb is forecast to grow its earnings by 442% in 2021 and 84% in 2022.
Analysts covering the stock have a 12-month average price target of $47 which is 53% above its current trading price.
Shares of Trulieve Cannabis are up 363% in less than three years. A medical marijuana giant based out of Florida, Trulieve cultivates, produces, and distributes products to its branded dispensaries in the Sunshine State as well as in California, West Virginia, Massachusetts, Connecticut, and Pennsylvania. The company produces around 550 stock-keeping units that include flowers, edibles, vapes, topicals, capsules, and nasal sprays. As of May 5, Trulieve operates 87 dispensaries in the U.S.
In Q1 Trulieve reported sales of $193.8 million, an increase of 102% year over year and 15% sequentially. It was above Wall Street's revenue estimate of $189.86 million. Trulieve also reported GAAP earnings of $30.1 million, compared to $23.6 million in the prior-year period. Its adjusted EBITDA soared by 87% to $90.8 million in Q1 and the company’s operating cash flow more than doubled to $60.4 million, from just $24 million.
Since the end of March 2020, Trulieve Cannabis has opened 38 medical outlets and is now focused on gaining traction in other states via acquisitions.
Earlier this month, Trulieve Cannabis agreed to acquire Harvest Health & Recreation in an all-stock deal valued at $2.1 billion. Harvest Health is another multi-state operator with a presence in nine states. It has 39 operational dispensaries and was forecast to report revenue of $379 million in 2021 with an adjusted EBITDA of $82 million.
Wall Street expects Trulieve Cannabis to increase sales by 68.7% to $880 million in 2021 and by 42.7% to $1.26 billion in 2022. However, after accounting for the above-mentioned acquisition, Trulieve sales might be close to $1 billion in 2021.
Analysts covering the stock have a 12-month average price target of $72.26 which is 90% above its current trading price.
Innovative Industrial Properties
The final stock on our list is Innovative Industrial Properties, a cannabis-focused real estate investment trust. IIPR is an ancillary cannabis company and its stock is up an astonishing 850% since its IPO.
Marijuana producers in the U.S. have constraints when it comes to access to capital from banking companies. Here is where IIPR’s triple net lease business model comes into play. The REIT acquires properties from cannabis producers and leases them back under long-term contracts.
In Q1, the REIT’s sales more than doubled to $42.9 million. Its net income rose 121.9% to $25.6 million as well. In 2020, IIPR’s sales were up 162% while its net income and adjusted funds from operations were up 191% and 180% respectively. Similar to most other REITs, IIPR has also grown via acquisitions and deployed over $600 million last year to expand its portfolio.
IIPR also pays investors a dividend of $5.28 per share each year, indicating a tasty yield of 3%.
The final takeaway
The three cannabis companies discussed here have outpaced peers and most other indexes in the last few years. The three firms are looking to establish a presence in multiple states and benefit from a rapidly expanding addressable market. As the companies are already profitable and enjoy robust operating leverage, investors should be a close watch on these stocks.
While Trulieve and Green Thumb are trading on the CNSX, IIPR trades on the NYSE.