On Dec. 3, 2018, Cresco Labs (CRLBF 2.75%), which was founded in 2013, began trading on the Canadian Securities Exchange (CSE) under the "CL" ticker symbol, and the next day, it became available on the over-the-counter (OTC) market too. Its opening price was $5.15 in the OTC market, and Cresco isn't trading much higher today, with its price currently around $5.70. On the CSE, the stock debuted at $8 and it's struggled to stay above that price, falling below $7.5 earlier this week. But that doesn't tell the whole story, as it's been a busy first year for the vertically integrated cannabis company which not only produces its own cannabis but sells and distributes it too, with operations in 11 states.
For U.S.-based cannabis companies, the CSE and the OTC exchanges have been the few places they've been able to raise cash and attract investors. With marijuana still federally illegal in the U.S., Cresco's operations are in violation of federal laws and thus the Chicago-based company is unable to list on the NASDAQ or the NYSE. Even Canada's largest exchange, the TSX, does not permit U.S. cannabis operators to list on its exchange. Here's what Cresco has been up to during its first year on the public markets.
The company was busy making big purchases
In April 2019, Cresco Labs rocked the industry by announcing it would acquire Canadian company Origin House (ORHOF), which is based out of Ontario, in an all-stock deal worth approximately 1.1 billion Canadian dollars. This was one of the largest acquisitions made in the U.S. cannabis industry involving publicly traded companies, with Canopy Growth's $3.4 billion acquisition of Acreage Holdings being the biggest if it's completed. The move is a way for Cresco to gain a large footprint in the California market, where Origin House has built up a strong brand and is a key distributor to more than 500 dispensaries in the state. However, with pot prices crashing, the industry falling into disarray, and investors become warier of the risks involved, the two companies ultimately modified the deal, cutting the valuation to CA$496 million. The acquisition is still pending, but it's expected to close in January.
In September, Cresco announced another big purchase: the assets from Tryke Companies giving Cresco six Reef Dispensary locations across Nevada and Arizona, including one prime spot near the Las Vegas Strip. It's a cash-and-stock deal valued at $282.5 million where Cresco will pay $55 million in cash and Tryke will also receive $227.5 million worth of Cresco shares.
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These moves have positioned Cresco for big opportunities heading into 2020, especially with the recreational market launching in Cresco's home state of Illinois on Jan. 1.
Cresco generated significant growth this year
Through the first nine months of the year, Cresco has been steadily growing its business. Year to date, revenue has totaled more than $87 million -- more than three times the $26 million it generated over the same period last year.
Like many marijuana companies, Cresco has also struggled with its bottom line, incurring a loss of $15 million over the past nine months. However, that's been a symptom of how fast the industry has been growing, as Cresco's selling, general, and administrative expenses rose 274% to $62 million so far in 2019. The bulk of those expenses stem from paying for more staff. Year to date, Cresco incurred $31 million for salaries, consulting, and professional fees, compared to just $4 million for those expenses over the same period last year.
The company also burned through $19 million in cash in its operations over the past nine months. However, with cash and cash equivalents totaling $74 million, Cresco has ample funds on hand even if that rate of burn continues. Ideally, the company would be cash flow positive, but it still has time to get there without investors having to worry about it running out of money.
Where the stock is today
Although early investors might be disappointed that the stock has only shown modest gains since it began trading publicly, things could have been worse. Cresco's stock fell around 50% over the past six months, a tad better than the 53% decline the Horizons Marijuana Life Sciences ETF experienced during that time. Even cannabis giant Canopy Growth's stock fell by more than 54% in the last six months.
Cresco is one of the better buys in the industry today. With a modest price-to-sales ratio of less than seven, it's a much better deal than a stock like Canopy Growth, which trades at 27 times its sales.
This past year has been a bit of a disappointment for Cresco Labs, but with a decent valuation, legalization continuing to progress in the U.S., and many growth opportunities ahead for the company in 2020, it looks like a good buy today as investors could earn much stronger returns from the stock next year and beyond.
