You've no doubt heard of Cronos Group (CRON -1.66%). It's the top-performing marijuana stock of all time. You're likely familiar with Tilray (TLRY) as well. It ranked as the top Canadian cannabis stock of 2018 after a sizzling initial public offering (IPO).
But there's a company that just completed an important step toward becoming a pot powerhouse that many investors probably haven't heard of. U.S.-based Cresco Labs (CRLBF -4.76%) cleared a big hurdle on Tuesday in its plan to acquire Origin House (ORHOF). The combined revenue of Cresco and Origin House in the last quarter topped the sales of Cronos and Tilray combined.
You might not know a lot about Cresco. But with the acquisition of Origin House on track, this is one under-the-radar pot stock you should keep your eye on. Here's why.
Image source: Getty Images.
Thumbs-up for the big deal
Cresco announced on April 1, 2019, that it planned to buy Origin House. But it wasn't an April Fools' Day joke. At the time, the proposed transaction was the biggest acquisition of a public U.S. cannabis company ever. Canopy Growth's deal to buy Acreage Holdings announced a few weeks later bumped the Cresco-Origin House deal from the top spot.
But while Canopy Growth must wait for federal marijuana laws in the U.S. to change to go through with its acquisition of Acreage, Cresco's effort to buy Origin House is moving along quite nicely. On Tuesday, Origin House shareholders voted to approve the proposed deal. The acquisition required a two-thirds majority. The actual vote reflected 99.56% of votes cast in favor of the acquisition.
It's not a completely done deal just yet, though. On Monday, Origin House received a request for additional information on the proposed transaction from the U.S. Department of Justice Antitrust Division. Origin House CEO Marc Lustig said that his company and Cresco "are confident that we will be able to submit all requested documentation to the Department of Justice as soon as possible."
The two companies also must receive Canadian approval for the acquisition since Origin House is based in Ottawa, Canada. However, it doesn't seem likely that there will be any significant problems with regulators in either the U.S. or Canada.
Introducing the new Cresco Labs
Cresco Labs and Origin House executives refer to the combined company that should be on the way as a "North American cannabis powerhouse." That's not just hyperbole.
The "new" Cresco Labs after the acquisition of Origin House closes will operate in 11 U.S. states and in Canada. This represents a combined total addressable market of 185 million people. Cresco brings 21 cannabis retail stores to the table with 51 licenses to open retail locations.
Origin House ranks as the leading distributor of legal cannabis products in California, the biggest cannabis market in the world. It has around 500 distribution partners and markets more than 50 cannabis brands. Combined with Cresco, the organization will have more than 725 distribution partners and over 56 brand relationships.
Cresco believes that the acquisition of Origin House will make it the No. 1 cannabis consumer packaged goods company in North America. It also expects that the transaction will make it the sixth-largest cannabis company in terms of market cap.
Why the stock could get hotter
The stocks of both Cresco Labs and Origin House are off to a great start in 2019, with shares of each company rising more than 45% year to date. I think that Cresco could get even hotter after the acquisition is finalized.
California's legal recreational marijuana market didn't launch nearly as well as hoped last year. However, the situation should improve in the state -- and that will help Cresco's distribution business picked up from Origin House.
Cresco also should benefit as cannabis markets in the states where it operates mature. These include several states that should have cannabis sales exceeding $1 billion by 2022 such as Arizona, Florida, Massachusetts, and Michigan.
In addition, Cresco should profit from new markets. Its home state of Illinois has legalized recreational marijuana, with the market opening in 2020. Canada is expected to open the legal market for cannabis derivatives including concentrates used in vaping later this year. That should boost sales for the 180 Smoke Canadian vape retail operations that Cresco will gain once its buyout of Origin House closes.
Probably the biggest potential catalyst for Cresco, though, is the possibility that U.S. marijuana laws might be revised. I think that the stock would trade at a much higher price if it could be listed on a major U.S. stock exchange and the risks associated with operating in violation of federal laws went away.
My view is that these laws will change sooner or later. When they do, Cresco Labs will definitely be a pot powerhouse that could be worth more than Cronos and Tilray.
