Please ensure Javascript is enabled for purposes of website accessibility

Forget Canopy Growth: This Marijuana Stock Is Much Better

By Cory Renauer - Apr 14, 2019 at 6:04PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

For real earnings, you need to head south of the border.

Canopy Growth (CGC 1.51%) is the world's largest cannabis company, but it isn't making nearly as much money as Florida's leading operator of dispensaries. Trulieve Cannabis (TCNNF 1.51%) took an early lead in the state's heavily regulated medical marijuana market, and it has a good chance to hold on to that lead.

Trulieve Cannabis enjoys some advantages that Canopy Growth investors can only dream of, and it's already producing positive cash flows. Here's why Trulieve stock has a much better chance of outperforming the market than Canopy in the years ahead.

Stack of hundred dollar bills covered with marijuana.

Image source: Getty Images.

An enviable position

Florida didn't vote to legalize medical cannabis until 2016, and there are already 207,869 patients with active ID cards that allow them to enter any of the 114 licensed dispensaries across the state and purchase their prescription. Since Canopy Growth listed on a major U.S. stock exchange, it can't operate south of the border. Trulieve, which is headquartered near the state capital, was in the right place at the right time, with licenses for 14 shops before the state decided to limit the number of retail locations to 25 per operator, plus five additional locations after 100,000 patients enrolled.

That means out-of-state competition from Curaleaf (CURLF 0.62%), and its peers should remain limited to 30 retail locations each. With 14 locations grandfathered in, Trulieve can raise its store count from 26 at present to 44 locations and remain the most popular licensed retail outlet in the state.

While most states allow dispensaries to stock their shelves with products from independent vendors, approved medical marijuana treatment centers are the only businesses allowed to grow and process the cannabis products they sell in Florida. Curaleaf and other out-of-state operators need to build or buy a vertically integrated business that can track everything from seed to sale before opening its doors. There are only so many businesses with that kind of money to burn.

Medical marijuana.

Image source: Getty Images.

Something you don't see enough of

With a head start in a heavily regulated market, Trulieve can provide a better quality product at competitive prices and still produce a profit for shareholders. Meanwhile, Trulieve's competitors are paying through the nose just to get their foot in the door. 

Cresco Labs (CRLBF 4.37%) recently acquired VidaCann, which operates seven dispensaries in Florida now, and will probably open seven more this year. Cresco will pay $120 million for VidaCann in an all-stock transaction, and realizing a return on this investment isn't going to be easy, because medical marijuana prices in Florida now are probably as good as they're going to get. In every state so far, marijuana prices per gram steadily declined after businesses began competing with each other for customers. 

Boring is beautiful

Trulieve's Florida-focused approach might not seem ambitious, but it has kept the company from overpaying for out-of-state businesses, until recently. 

A focused operation that didn't bite off more than it can chew allowed Trulieve to record sales, general, and administrative (SG&A) expenses that reached just 28% of revenue in 2018. Canopy Growth has done the exact opposite. Rapidly expanding to dozens of countries, and hiring lots of employees that are probably pretty bored right now drove SG&A up to 139% of Canopy's total revenue last year. 

While Canopy's operations lost $302 million last year, Trulieve's operations earned $75.2 million. In 2019, management thinks revenue will grow another 108% to $214 million. Near the bottom line, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) are expected to double from $45.6 million in 2018 and reach $92 million in 2019.

Closeup of small marijuana bud at a large indoor growing operation.

Image source: Getty Images.

Please stop

Despite top and bottom lines surging in the right directions, Trulieve recently took steps toward becoming another out-of-state operator with negative cash flows. California's cannabis market is large, but heavy state and local taxes have made competing with the illicit market extremely difficult. Despite having plenty of room to grow in the state where it's producing profits, Trulieve spent $4 million in cash to acquire a single licensed dispensary in California last November.

In December, Trulieve splashed out on three medical marijuana dispensaries in Massachusetts and their cultivation and processing facilities for $4.4 million cash. Trulieve's most worrisome move came in February, when the company filed a CA$250 shelf offering that suggests some share dilution to fund a multi-state expansion could be ahead. 

Trulieve is a far better marijuana stock than Canopy Growth, but it belongs in your watchlist right now instead of your portfolio. While it makes sense to diversify geographically, rushing into acquisitions at inflated prices is more likely to lead to losses than a successful multi-state operation. It's probably best to wait another couple of quarters to make sure Trulieve doesn't adopt a growth-at-any-cost approach that resembles its money-losing peers.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Trulieve Cannabis Stock Quote
Trulieve Cannabis
TCNNF
$13.09 (1.51%) $0.20
Canopy Growth Stock Quote
Canopy Growth
CGC
$2.69 (1.51%) $0.04
Curaleaf Holdings, Inc. Stock Quote
Curaleaf Holdings, Inc.
CURLF
$5.18 (0.62%) $0.03
Cresco Labs Inc. Stock Quote
Cresco Labs Inc.
CRLBF
$3.06 (4.37%) $0.13

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
322%
 
S&P 500 Returns
113%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/07/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.