Few industries have had investors seeing more green over the past couple of years than legal marijuana. According to the latest projections in "Marijuana Business Factbook 2019" from Marijuana Business Daily, legal aggregate U.S. weed sales should catapult from between $8.6 billion and $10 billion in 2018 to between $11.2 billion and $13.7 billion this year.
To put these figures into some perspective, Wall Street has opined that Canada will be generating between $5 billion and $6 billion in annual cannabis sales by 2022 when its pot industry begins to fully mature. That's potentially less than half of what the U.S. market will generate in 2019, despite the fact that only nine states currently allow recreational weed to be legally sold (adult-use marijuana is legal for consumption in Vermont, but not for sale). In terms of sheer potential, the U.S. is the crown jewel of the cannabis industry.
Perhaps, then, it's no surprise that Wall Street expects some of the biggest long-term marijuana stock gains to come from U.S.-based companies. As of early last week, there were three U.S.-headquartered pot stocks that Wall Street's consensus price target suggests will (at least) double.
At its closing low last week, a share of Garden Grove, Calif.-based, KushCo Holdings (KSHB) could be had for just $4.15, meaning its market cap had fallen below $370 million. Yet, according to Wall Street's consensus price target, ancillary player KushCo could be worth $8.40 per share, or nearly three-quarters of a billion dollars in market cap.
KushCo has certainly had its fair share of problems of late. Having initially absorbed Chinese tariffs on its imported vape products, its gross margin has come in below the company's targeted level of 30% (or higher) for a couple of quarters. Additionally, accounting errors that led to restatements of its 2017 and 2018 operating results haven't exactly inspired confidence in management.
But the thing to remember about both of KushCo's problems is that neither have long-term legs. The company is correcting its margins weakness by passing along tariffs costs to consumers, and the accounting errors, which have led to tighter governance, didn't impact sales, cash on hand, or cash flow.
The reason I chose to add KushCo to my own portfolio in May has to do with its ability to hit multiple niches in the ancillary space. It's one of the most well-known providers of compliant packaging and branding solutions. Since the legality of cannabis can change by country, state, or jurisdiction, KushCo takes pains to ensure its more than 5,000 clients remain compliant, as well as help their products stand out in an increasingly crowded field.
KushCo also has a line of vape products that should be set for expansion in Canada by this coming October, which is when Health Canada is expected to legalize numerous alternative cannabis consumption options.
Lastly, the company is also in line to benefit as derivatives become more popular with the younger generation. As a provider of hydrocarbon gases and solvents for the respective production of oils and concentrates, KushCo finds itself as a critical middleman in a number of cannabis functions.
At its trough last week, vertically integrated dispensary operator Trulieve Cannabis (TCNNF 0.73%), which is based in Quincy, Florida, ended at $10.34 a share, its lowest close in more than four months. But if Wall Street's consensus price target means anything, its share price is set to double to $20.78.
Whereas most U.S. dispensary stocks have been hemorrhaging cash as they expand their operations into new states, Trulieve has remained focused on its home market of Florida. The company ended its most recent quarter with 30 open retail stores, of which 28 of them were located in the Sunshine State. Because it's been busy building up its brand recognition close to home, it's been able to gobble up a majority of Florida's medical marijuana market share. As a result, Trulieve has been, and continues to be, highly profitable.
In the company's first-quarter operating report, it offered up guidance for 2019 and 2020. Sales this year are expected to more than double to a range of $220 million to $240 million, with up to $400 million in revenue projected for 2020. All the while, adjusted EBITDA in 2020 might be up to four times higher than it was in 2018.
This is also a company with aspirations of moving into additional states. Acquisitions in California, Massachusetts, and Connecticut put it on pace to become a multistate player. It will, however, be a more drawn-out process establishing itself outside of its home market.
Even if expenditures rise a bit as the company looks to diversify its revenue stream geographically, the point is that no marijuana stock is cheaper on the basis of forward price-to-earnings than Trulieve Cannabis. That, along with its robust growth outlook, makes Wall Street's price target very achievable.
According to Wall Street, though, the biggest gain of all could be had by one of 2019's worst-performing pot stocks: Culver City, Calif.-based MedMen Enterprises (MMNFF). After ending Wednesday at just $1.93 a share, the Street anticipates that MedMen could hit $6, more than tripling its current market cap of close to $950 million.
Wall Street's bullishness on MedMen likely revolves around its early success in launching its brand in California. The company's California retail dispensaries have been averaging sales per square foot that rival that of Apple stores, thereby proving that its upscale experience and efforts to normalize the cannabis-buying process are working.
MedMen is also in the process of acquiring privately held PharmaCann for $682 million in an all-stock deal. Once closed, the combined company will have nearly seven dozen retail licenses, with MedMen expected to make a sizable push into Florida's medical marijuana market and Illinois, now that it's on track to roll out recreational cannabis by this coming January.
But MedMen has something else that KushCo and Trulieve Cannabis don't: reasons to stay away. MedMen has been losing money hand over fist, with its latest quarterly report featuring a $53.3 million loss from operations. Over the last nine months, MedMen's operating loss has surpassed $178 million. Even with an infusion of cash from Gotham Green Partners, it's unclear if the company has enough capital on hand to execute on its long-term strategy.
We're also seeing significant slowing in organic sales growth in what should be MedMen's most impressive market. Sales growth in the company's existing California locations grew by a mere 5% from the sequential second quarter. As competition in the dispensary space has picked up, MedMen has been exposed for not being as much of a standout as Wall Street initially thought. This is one "bullish" case I'd suggest avoiding.