Following an ugly fourth quarter, marijuana stocks are on fire once again. In January, the Horizons Marijuana Life Sciences ETF, the first-ever cannabis ETF to trade in Canada, gained close to 50%, with 15 out of roughly four dozen pot stocks rising by at least 50%.
Why such optimism, you ask? Look no further than the legalization of recreational weed in Canada last October, which ended nine decades of adult-use prohibition, and the ongoing legalization of pot at the state level in the United States. Going green in Canada is expected to balloon sales in the country from a few hundred million dollars to perhaps as much as $6 billion by 2022.
Meanwhile, the U.S. has a much larger population and is broadly considered to be the most lucrative pot market in the world...if cannabis were legal at the federal level. Nevertheless, with two-thirds of all states having given weed the green light in some capacity, there's clearly money to be made.
The top 10 revenue-producing marijuana stocks in 2019
This stands to be a big year of sales growth for marijuana stocks. Even with a number of pot stocks operating on noncalendar fiscal years -- i.e., their fiscal year ends on June 30 or perhaps a different date other than Dec. 31 -- and therefore unable to take full advantage of Canada's legalization and/or state-level expansion in the U.S., Wall Street and investors are still expecting big sales figures.
When perusing more than four dozen marijuana stocks, 10 stand out as being on track to produce north of $100 million (U.S.) in sales in 2019. And when I say "2019," I mean each respective company's fiscal 2019. That could mean ending on June 30, 2019, or it could represent a normal calendar year, meaning any comparisons between companies probably wouldn't be apples to apples. This screen was also limited by minimal coverage from Wall Street firms, and, in many instances, sales estimates from just one or two analysts.
With this in mind, here are the pot stocks offering the highest revenue potential in fiscal 2019, listed in descending order:
- Aurora Cannabis (NYSE:ACB): $244.5 million
- The Green Organic Dutchman: $227.1 million
- Canopy Growth (NYSE:CGC): $190.4 million
- MedMen Enterprises: $188.9 million
- iAnthus Capital Holdings (NASDAQOTH:ITHUF): $181.4 million
- Village Farms International: $147.6 million
- GW Pharmaceuticals: $123 million
- KushCo Holdings (NASDAQOTH:KSHB): $117.9 million
- Aphria (NYSE:APHA): $107.4 million
- CannTrust Holdings: $105.5 million
Three prominent sales growth trends this year
As noted, there are limitations with the data. The Green Organic Dutchman, for instance, has just one analyst estimate, and it doesn't appear to have been adjusted in some time. In other words, the covering analyst may not be taking into account supply issues that have plagued Canada in the early going.
With a market cap of close to $17 billion, you're probably also wondering how Canopy Growth is only forecast to generate $190.4 million in revenue this year. The answer is that the company's fiscal year ends on June 30, 2019, so it isn't able to take advantage of a full year of Canadian recreational weed sales until fiscal 2020.
Check out the latest Canopy Growth earnings call transcript.
But even with these limitations, three sales growth trends stand out.
First, as you might expect, growers are expected to lead the way in sales growth. Aurora Cannabis, Canopy Growth, and Aphria are expected to be the top three cannabis producers by peak annual production, and not surprisingly, they should also be substantial revenue producers in 2019. Aurora expects to be yielding an annual rate of more than 150,000 kilograms by the end of March and looks to be on its way to around 700,000 kilos in peak production by 2021 or 2022. Meanwhile, Canopy Growth and Aphria have the potential for more than 500,000 kilos and 255,000 kilos in peak output, respectively.
Secondly, U.S.-based marijuana dispensaries are expected to generate significant revenue in 2019, albeit acquisitions will give a number of these vertically integrated dispensaries a sales boost. iAnthus Capital Holdings, for example, recently closed on its $600 million-plus buyout of MPX Bioceutical, increasing its presence to 11 states from 6 and lifting the number of licensed dispensaries it could open to 63. The combination should allow iAnthus to become a top sales producer in 2019 as it aims to open new retail locations.
Finally, you'll note that quite a few ancillary players should generate north of $100 million in sales in 2019. KushCo Holdings, which is best known for providing packaging and branding solutions to more than 5,000 cannabis growers worldwide, as well as hydrocarbon gases and solvents for the respective manufacture of oils and concentrates, is expected to see sales more than double in 2019. With a flurry of new pot products hitting the market, differentiation in packaging is going to matter more than ever, providing a moat for KushCo to thrive.
One common theme
However, no matter how much sales growth the cannabis industry will deliver in 2019, one common theme investors can expect is operating losses. Sure, we could see growers benefiting from International Financial Reporting Standards accounting, which can lead to beneficial fair-value adjustments on biological assets (i.e., cannabis plants). But when looking at the basics of revenue and operating expenses, without one-time benefits and costs, it's unlikely that any of the above-named pot stocks is going to generate an operating profit in 2019.
Does this mean that marijuana stocks are a lost cause? Well, not necessarily. It simply suggests that investors are going to have to be patient while allowing the cannabis industry to mature. It's going to take another year or two for pot growers to get their output up to par, as well as for regulatory red tape to sort itself out in Canada. Expecting operating profits this early in the growth cycle just isn't reasonable.
In other words, it's worth keeping a close eye on sales growth trends, but don't put too much weight behind revenue figures until we begin to see demonstrable evidence of bottom-line improvements.