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Hedge Fund Hotshot Whitney Tilson Favors These Marijuana Stocks

By Sean Williams – Updated Sep 17, 2019 at 3:30PM

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A trio of U.S. cannabis stocks are clearly on Tilson's radar.

There's little denying the potential that lies ahead for the cannabis industry. Depending on your preferred source, worldwide weed sales could grow between fivefold and 18-fold over the next decade. That should give long-term-oriented investors plenty of opportunity to profit in the years that lie ahead.

Of course, marijuana isn't just attracting retail investors. Wall Street has begun to take note of this fast-growing industry. In fact, even investors known for their prowess of spotting value have taken a liking to marijuana.

Last week, hedge-fund manager and investment newsletter author Whitney Tilson announced that there were three pot stocks, highlighted by Tom Carroll of Stansberry Research in his monthly advisory service, Cannabis Capitalist, which he, too, now favors. 

A person holding a vial of cannabidiol oil in front of a flowering cannabis plant.

Image source: Getty Images.

Charlotte's Web

Perhaps it should be no surprise that the cannabidiol (CBD)-focused Charlotte's Web (CWBHF -1.74%) is a company that Tilson now has his eye on. CBD being the cannabinoid that doesn't get users high, but is best known for its perceived medical benefits. Said Tilson,

It's the leader in CBD products, with a five-year lead on everyone else. It has strong brand recognition and great intellectual property on its seeds and strains. And it has far less regulatory uncertainty than most other companies. I think this is a "must own" in the sector.

The point that bears echoing here is the lack of regulatory uncertainty following the signing of the Farm Bill into law by President Trump this past December. In doing so, the industrial production of hemp and hemp-derived CBD was legalized. Although certain states still maintain tougher laws on hemp-derived products, it's no surprise that the company's retail door count has more than doubled this year to more than 8,000 from 3,680. Landing a topical CBD product deal with grocery chain Kroger for 1,350 stores across 22 states doesn't hurt, either.

Charlotte's Web hasn't been afraid to bolster its capacity to meet the incredible demand thus far for CBD products. After planting 300 acres of hemp last year, the company somewhat recently announced an increase in planting to 862 acres in 2019. This sheer increase in volume, along with an increase in retail doors, should allow Charlotte's Web to come close to doubling sales in 2019 and, once again, in 2020.

This is also one of the few pot stocks that's been profitable in the early stages of the cannabis rollout throughout North America. Suffice it to say, there's little argument that Charlotte's Web has the tools to be a longtime leader in the CBD space.

Two miniature shopping carts, with one holding a cannabis flower and the other holding vials of cannabis oil.

Image source: Getty Images.

Trulieve Cannabis

Surprisingly, you won't find brand-name marijuana stocks among those Whitney Tilson is eyeing, as evidenced by Trulieve Cannabis (TCNNF 2.12%).

Multistate dispensary operator Trulieve Cannabis isn't a company that most marijuana investors are going to know, despite its $1 billion valuation. That's because it's not exactly trying to expand into as many markets as possible like its peers. Rather, Trulieve has focused nearly all of its attention on its home state of Florida, where it's opened 30 stores. By placing most of its effort into the medical marijuana-legal Sunshine State, it's been able to successfully gobble up market share, build its brand, and generate a recurring profit. Here's what Tilson had to say on Trulieve:

It's the dominant cannabis company in Florida, which has a robust, limited-license medical cannabis program and a population that is rapidly adopting medicinal cannabis solutions. It recently started venturing into more states and is one of the few companies turning a real profit. Also, I think it's a strong candidate to be acquired -- probably one of the first to get snapped up in the coming wave of consolidation.

As Tilson noted, Trulieve is venturing into new states beyond Florida, including California, Massachusetts, and Connecticut. The former two should be billion-dollar markets by 2024, with California representing perhaps a quarter of all U.S. sales in five years. Moving into new markets likely means an increase in expenditures, but this is unlikely to phase the company's ability to remain strongly profitable. At 13 times next year's consensus earnings, it just might be the cheapest pot stock in the entire industry.

A tipped over clear jar packed with cannabis buds that's lying next to a clear scoop that's holding a large cannabis bud.

Image source: Getty Images.

Green Thumb Industries

Lastly, Tilson echoed support for vertically integrated multistate operator Green Thumb Industries (GTBIF 10.99%), which was also highlighted by Carroll.

It's no secret that the multistate operator space in the U.S. is highly competitive, with Green Thumb having to grow organically and through acquisitions. To date, the company has 95 retail licenses, which is good enough for a top-five position among multistate operators, with a presence in 12 states.

Maybe the most exciting acquisition was closed in the previous quarter. Green Thumb wound up acquiring privately held Integral Associates, which is the company behind the Essence-branded retail stores in the Las Vegas area. Essence in the only company allowed to have a cannabis store on the Las Vegas Strip, and it gives Green Thumb access to what could become the state with the highest per-capita cannabis spending by 2024. According to Tilson, "It's [Green Thumb] a vertically integrated U.S. player that's very prudent with capital and is growing intelligently, with a healthy mix of organic license award wins and acquisitions."

Consistent with the other cannabis players mentioned here, Green Thumb looks to be on the fast track to profitability – albeit it's the only one of the three not there yet. Following its most recent quarter, which delivered 27% sequential comparable-store growth, Green Thumb will look to push into the profit column on a recurring basis in 2020 as it opens new locations and aims to make earnings-accretive acquisitions. 

Sean Williams has no position in any of the stocks mentioned. The Motley Fool recommends Charlotte's Web. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Green Thumb Industries Stock Quote
Green Thumb Industries
$10.40 (10.99%) $1.03
Charlotte's Web Holdings, Inc. Stock Quote
Charlotte's Web Holdings, Inc.
$0.40 (-1.74%) $0.01
Trulieve Cannabis Stock Quote
Trulieve Cannabis
$8.68 (2.12%) $0.18

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