Canopy Growth (NYSE:CGC) 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 (OTC:TCNNF) 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 (OTC:CURLF), 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 (OTC:CRLBF) 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.