To say that 2019 didn't go as planned for marijuana stocks would be a serious understatement.
Everything looked perfect heading into 2019, with Canada having recently legalized adult-use sales and derivative products expected to hit dispensary shelves later in the year. Then, everything fell apart. The launch of derivatives was delayed until mid-December 2019, and supply issues wreaked havoc throughout the year. The end result was that most pot stocks lost money last year and saw their share prices get clobbered.
The good news is there very well could be exceptions to the rule in 2020. The following four cannabis stocks should be among the most profitable this year. And by "profitable," I don't mean just in earnings per share (EPS); I mean in terms of total net income for the year (i.e., Wall Street's EPS consensus for 2020 multiplied by a company's average outstanding share count in the most recent quarter).
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Trulieve Cannabis: $78.3 million in estimated net income
Interestingly, the most profitable marijuana stock on the planet in 2020 might be vertically integrated multistate operator (MSO) Trulieve Cannabis (TCNNF +7.83%). Based on Wall Street's consensus of $0.71 in EPS this year, the company is expected to bring home more than $78 million in net income.
The secret to Trulieve's success -- it has been consistently profitable for some time now -- is the company's narrow focus on its home market of Florida. Unlike most MSOs, which have arguably spread themselves thin by expanding to as many legalized states as possible, Trulieve has spent most of its effort building its brand and presence in the Sunshine State. In total, Trulieve has opened 40 dispensaries in Florida, and in the third quarter, it generated more than $23 million in operating profit without the aid of one-time benefits or fair-value adjustments.
Although adult-use legalization no longer looks to be in the cards for Florida in 2020, the state is still capable of significant cannabis sales from the medical side of the equation. In fact, the State of the Legal Cannabis Markets report is calling for Florida to generate the third-most sales on an annual basis by 2024. Assuming Trulieve keeps its focus on the Sunshine State, its expenses should be kept in check while operating income soars.
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Innovative Industrial Properties: $47.8 million in estimated net income
On a per-share basis, there isn't a marijuana stock slated to make more money in 2020 than real estate investment trust (REIT) Innovative Industrial Properties (IIPR 1.25%). Wall Street's current consensus is for $4.03 in EPS in full-year 2020.
What's made Innovative Industrial Properties such a winner is the company's business model. As a REIT, it acquires cannabis cultivation and processing sites and then leases them out for extended periods of time, thereby reaping the rewards of rental income. The company is also able to pass along annual rental increases as well as collect a property management fee that's based on this modestly rising rental rate. In other words, on top of growing by acquisition, it's able to generate modest organic growth from its assets to help stay ahead of the inflationary curve.
After beginning 2019 with 11 properties in its portfolio, Innovative Industrial ended the year with 46 assets in 14 states. These properties had a weighted-average remaining lease length of 15.3 years and, more importantly, an average yield of 13.6% on its $489.3 million in invested assets. In layman's terms, this company should see a complete payback on its investments in just over five years, with everything else being gravy.
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The Valens Company: $40.4 million in estimated net income
When it comes to showing investors the money, extraction-services provider The Valens Company (OTC: VLNCF) looks ready to oblige. Converted to U.S. dollars, Valens should generate north of $40 million in net income this year.
Valens finds itself at the center of the hottest trend in the cannabis space right now: derivatives. Alternative consumption products, such as edibles and infused beverages, generate significantly higher margins for growers than traditional dried flower. But in order to create these higher-margin products, cannabis and hemp biomass need to be processed to derive the resins, distillates, concentrates, and targeted cannabinoids used in them. That's where Valens Company comes in.
Valens already has the annual run-rate capacity to process about 425,000 kilos of hemp and cannabis biomass per year, but it plans to increase this capacity to closer to 1 million kilos annually. Further, with fee-based contracts that typically run two or more years in length, Valens Company often has a good idea of how much it'll be generating in cash flow each quarter. This makes it easy for the company to remain profitable.
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Harvest Health & Recreation: $40.3 million in estimated net income
Last, but not least, vertically integrated MSO Harvest Health & Recreation (HRVSF +0.00%) appears to be on track to produce north of $40 million in net income in 2020.
Harvest Health has primarily grown its presence by acquisition, but it does have the ability to organically grow via existing licenses it holds. Assuming all of Harvest Health's announced acquisitions close, the company will have more than 210 licenses, of which around 130 will be for dispensaries, and the remainder will cover cultivation and processing sites in 18 states. The approximately 130 retail locations make it either No. 1 or No. 2 among publicly traded MSOs. In essence, it's a winner because of its sheer size.
Harvest Health & Recreation's management team has also made a number of smart moves. For one, the company has the largest presence among MSOs in Arizona, a state that's likely to legalize recreational marijuana in Nov. 2020. Harvest Health also signed a mammoth deal in June with the Asian American Trade Associations Council to provide its Colors, CBx Essentials, and Harvest-branded cannabidiol (CBD) products in more than 10,000 convenience stores and gas stations around the country.
Despite losing money in 2019, Wall Street is expecting a green push for Harvest Health in 2020.
