Last year was supposed to be marijuana's true moment in the sun, with the industry proving to Wall Street and investors that it could translate strong sales growth in recurring profits. Unfortunately, things didn't go anywhere near as planned.

In Canada, supply issues have adversely impacted the weed industry since day one of adult-use sales on Oct. 17, 2018. These problems have been perpetuated by regulatory agency Health Canada delaying the launch of derivative products and struggling to approve cultivation and sales licensing application in a timely manner. We've also witnessed Ontario, Canada's most-populous province, seriously slow-step the rollout of physical dispensaries. Only 24 stores were open on the one-year anniversary of recreational weed sales, leading to a supply bottleneck and a still-thriving black market.

Meanwhile, high tax rates and Swiss cheese-like approvals that allow jurisdictions the right to deny cannabis retailers a presence have made life difficult for U.S. pot stocks. High taxes on marijuana products have especially problematic in California, where legal sales have been virtually stagnant for two years.

A tipped over jar packed with cannabis buds that's lying atop a small pile of cash.

Image source: Getty Images.

But according to Wall Street investment bank Stifel, the decline in cannabis stocks in 2019 opens the door to some intriguing values in the U.S. market. Stifel recently singled out two vertically integrated multistate operators (MSO) as its favorites. 

Green Thumb Industries

The first is Green Thumb Industries (GTBIF -1.96%), which offers investors up to 176% potential upside, based on the closing price of GTI (as the company is known) the day prior to Stifel issuing a $32 Canadian target price ($24.47 U.S.).

Stifel's primary reason for being enamored with Green Thumb has to do with the company's cash flow, which is considerably higher than that of its peers. A quick peek at GTI's third-quarter operating results shows that it nearly quadrupled year-over-year sales, and improved sequential quarterly revenue by a whopping 52%. Although the company still wound up losing $17.1 million, EBITDA and adjusted operating EBITDA came in at $1.6 million and $14.1 million, respectively, which reversed year-ago losses in both metrics. This would appear to suggest that GTI is really close to turning the corner to profitability, especially with a number of new dispensaries having been opened in 2019. 

The plan for GTI in 2020 continues to be retail expansion, retail expansion, and more retail expansion! Last year, it acquired Integral Associates in Nevada, giving the company a presence in a market that could feature the highest per-capita cannabis spending in the country by 2024, according to the State of the Legal Cannabis Markets report by Arcview Market Research and BDS Analytics. It's also ramping up its presence in Illinois, which commenced adult-use marijuana sales on Jan. 1, 2020.

A large cannabis dispensary sign in front of a retail store.

Image source: Getty Images.

Curaleaf Holdings

The other big U.S. pot stock that Stifel believes cannabis stock investors would be smart to buy is Curaleaf Holdings (CURLF). Stifel's CA$24 price target implies upside of 210%.

Curaleaf is a veritable giant in the U.S. MSO space, due in part to its acquisitions, as well as organic dispensary expansion. It has two gigantic acquisitions pending at the moment. The first is the purchase of Cura Partners and its Select brand, which is one of the top-selling cannabis brands on the West Coast. The other is the purchase of privately held MSO Grassroots, which'll help push Curaleaf into seven new states, add about 20 open retail locations (at least when the deal was announced), and increase the company's retail license count by 60. Assuming these acquisitions close, Curaleaf should hold the rights to open 131 dispensaries, which could be tops among MSOs.

According to management, Curaleaf could be the first pot stock to generate $1 billion in annual sales this year. This, of course, is contingent upon the Select and Grassroots deals closing, and the company effectively pushing into the 19 states it'll have representation in. Based on Curaleaf's pro forma sales during the third quarter amounted to $129 million, $1 billion in 2020 sales isn't out of the question. 

A green highway sign that reads, Now Entering Florida, with a white cannabis leaf on the right-hand side.

Image source: Getty Images.

Here's the Stifel "buy" that you should really be watching

While Stifel has laid out its case for Green Thumb and GTI, I'm more a fan of another U.S. MSO that Stifel also has a buy rating on: Trulieve Cannabis (TCNNF -2.17%).

When it comes to no-nonsense profitable marijuana stocks, there's pretty much Trulieve Cannabis and everyone else. What's made Trulieve so unique is that, rather than expanding into as many new states as possible and making massive acquisitions, the company has focused intently on its home market of Florida, a medical marijuana-legal state. Even as a medical-only state, Florida is likely to be top-3 in cannabis sales by 2024.

Somewhat recently, Trulieve Cannabis opened its 40th store in the Sunshine State. By keeping its expenses close to the vest, and focusing its efforts on building up its brands locally, Trulieve was able to report $70.7 million in third-quarter sales, yet only had $47.3 million in recurring expenses, including cost of goods sold. This means Trulieve was able to generate more than $23 million in operating profit just in the third quarter alone, without the aid of one-time benefits or fair-value adjustments (which also happened to work in its favor). 

Although Trulieve has plans to expand into California, Massachusetts, and Connecticut, its continued focus on Florida is the key reason it's been successful. Should Florida choose to legalize adult-use cannabis in 2020, a second round of big-time growth could be in the cards for Trulieve Cannabis.