As cliched as it probably sounds, the marijuana industry is expected to be the greatest thing since sliced bread. The industry has existed in the shadows for decades, generating tens of billions of dollars a year worldwide. But with the legalization of recreational marijuana in Canada, and the expected green light of adult-use weed from Mexico sometime later this year, cannabis is stepping out of the shadows and into a very profitable (and legitimate) scenario.
Yet, for as big as the cannabis industry could grow, it's suffering from early growing pains. Our neighbor to the north has seen sales stagnate, with Health Canada bogged down by applications for cultivation, processing, and sales licenses, and growers suffering from a lack of compliant packaging solutions. The end result has been significantly weaker-than-expected sales in Canada since the Oct. 17 launch of adult-use weed, and drastically lower sales and profit estimates for a majority of marijuana stocks.
These billion-dollar pot stocks aren't like their peers
Among the more than one dozen billion-dollar pot stocks (i.e., marijuana companies with a market value of at least $1 billion), nearly all have seen their profit projections for fiscal 2020 decline in recent weeks or months. But these four large marijuana stocks have bucked this trend.
Charlotte's Web Holdings
The biggest non-surprise here has to be that earnings estimates for Charlotte's Web Holdings (CWBHF -2.04%) have been steadily rising for months. Three months ago, Wall Street was looking for $0.58 per share in full-year 2020 EPS. The consensus now sits at $0.75 per share for the upcoming year.
The optimism surrounding Charlotte's Web, a manufacturer and distributor of hemp-oil and hemp-derived cannabidiol (CBD) products, is tied to CBD acceptance. CBD is the nonpsychoactive cannabinoid best known for its perceived medical benefits. Since it doesn't get the user high, it's the perfect means to attract users who may not otherwise try a cannabis- or hemp-based product. And since hemp is considerably easier to grow than cannabis plants, and is rich with CBD, Charlotte's Web has a burgeoning crop of low-cost CBD at its disposal.
According to figures from the company, it had its products in 3,680 retail locations at the end of 2018. But as of the end of March, this figure had surged to more than 6,000, primarily thanks to the passage of the Farm Bill, which legalized the production of industrial hemp and hemp derivatives. With CBD acceptance growing, Charlotte's Web looks poised to reap the rewards.
Please, sit down and/or grab hold of something, because I don't want you falling out of your seat and blaming me if you get hurt. That's because Tilray (TLRY) -- yes, Tilray -- is another billion-dollar pot stock with rising EPS projections for 2020. Just a month ago, Wall Street forecast a loss of $0.04 per share in 2020. As of today, the consensus now calls for a profit of $0.02 per share.
The about-face from Wall Street is certainly a head-scratcher given just how discombobulated management at Tilray seems at the moment. After just a few months in the recreationally legal environment, CEO Brendan Kennedy announced his company's intentions in March to focus future investments in Europe and the United States (via hemp). Although these are bigger long-term market opportunities than Canada, it just appears as if Tilray has been forced into this move after being outmaneuvered by its larger peers at home.
Then again, I can also see why Wall Street might be a little more bullish than it was a month ago. Earlier this month, Tilray announced a $32.6 million investment designed to add 203,000 square feet of combined production and processing capacity in Canada. All told, this brings the company's cultivation-based square footage to about 1 million, which should help its top line and help lower growing costs. Still, a profit of $0.02 per share isn't much to write home about when the company's valuation is still near $5 billion.
Another off-the-radar billion-dollar marijuana stock that's beginning to make waves is U.S.-focused multistate cannabis operator Cresco Labs (CRLBF 1.21%). Though the Street has yet to forecast 2020 expectations for Cresco, its 2019 EPS consensus has inched higher from $0.08 to $0.10 over the past month.
Why the bump? One possible reason could be the impending all-stock acquisition of Origin House (ORHOF) for what was announced as an $823 million deal. Origin House is one of the few holders of cannabis distribution licenses in California, so acquiring it would allow Cresco Labs to distribute its in-house brands to more than 500 dispensaries in the Golden State. Not to mention, Origin House wound up reporting $11 million in preliminary first-quarter operating revenue, representing 39% sequential sales growth from the fourth quarter.
The other possibility is simply that Wall Street foresees positive things for the vertically integrated dispensary model in the United States. Cresco Labs only has a handful of locations open now, but has 51 retail licenses at its disposal on a pro forma basis (i.e., assuming all pending acquisitions close), suggesting that it plans to get aggressive with retail expansion in the very near future.
The fourth billion-dollar marijuana stock with rising profit estimates is Trulieve Cannabis (TCNNF -2.51%), yet another U.S.-focused multistate cannabis operator. Wall Street initially expected $0.74 in full-year 2020 EPS as recently as a month ago, but is now looking at a consensus of $0.82. That makes Trulieve one of the cheapest pot stocks by forward P/E.
Although Trulieve has multistate aspirations -- it acquired retail businesses in California and Massachusetts late last year, allowing it to enter two new markets -- the company's strong profitability comes from being grounded in Florida. It has 27 open medical marijuana dispensaries in the Sunshine State, which means it's had a chance to beat better-known retail operators to the state's lucrative medical-pot market share. By focusing predominantly on just one state, Trulieve has kept costs down and pushed margins higher.
The big question is: What happens when Trulieve Cannabis begins devoting capital and attention to California, a market that could dwarf Florida's medical marijuana sales? Wall Street seems to think the company will remain very profitable, but it remains to be seen just how aggressive Trulieve gets from a spending standpoint on establishing itself in markets outside Florida.