At this time last year, cannabis stocks appeared primed to push toward profitability. To our north, Canada had recently legalized adult-use weed sales, while higher-margin derivatives were set to hit dispensary shelves in the latter half of 2019. Meanwhile, a number of U.S. states were considering the legalization of recreational or medical cannabis. It looked like the perfect setup, but looks can sometimes be deceiving.
Following an incredible first quarter, most pot stocks spent the rest of 2019 in a precipitous downtrend. However, vertically integrated multistate operator (MSO) Trulieve Cannabis (OTC:TCNNF) was an exception to the rule. Trulieve's 47% gain in 2019 wound up handily outpacing the 29% return of the benchmark S&P 500.
The big question is, can this outperformance continue in 2020?
As you're about to see, I believe it can. But before digging into the numerous reasons Trulieve Cannabis looks to be a pot stock to own, let's review the various risks that could hold it back.
All marijuana stocks carry risks, including Trulieve Cannabis
Though you'll see a bit later that there are two sides to this coin, one concern would be that Trulieve has predominantly focused on the Florida market to open dispensaries and cultivation farms. This leaves the company exposed to increasing competition in the Sunshine State, with Curaleaf Holdings having deep pockets and MedMen Enterprises expected to open as many as 30 retail locations in Florida. Trulieve can ill afford to lose market share in its core market.
To build on this point, there's also the possibility that Florida could legalize recreational marijuana in 2022. While the idea of adding adult-use sales to the mix probably sounds amazing, it might be just the opposite for Trulieve, which has focused all of its efforts on building up its brand with medical cannabis patients. Recreational legalization in the Sunshine State would require Trulieve to completely reestablish its market share, which wouldn't be an easy task in a highly competitive state.
Another concern is that costs are expected to rise in the foreseeable future as Trulieve moves beyond Florida. The company already has a small presence in California, Massachusetts, and Connecticut, and Trulieve's margins could be hit by the company's efforts to mirror its Florida blueprint of brand-building in these states.
And, of course, there's the recent short-seller report from Grizzly Research alleging multiple layers of fraud, which the company has denied.
All of these factors could be negative catalysts for Trulieve Cannabis. Thankfully, there is a slew of reasons it's a marijuana stock you should own, not avoid, in 2020.
Here's why Trulieve is the MSO to own
To begin with, and as stated earlier, there are two sides to focusing on Florida. Whereas the company has put most of its eggs in one basket, focusing on one of the most lucrative weed markets in the world has also been responsible for allowing Trulieve Cannabis to keep its expenses down. Having opened 40 dispensaries in the Sunshine State, Trulieve has been able to effectively build its brand with medical marijuana patients and thus keep its operating expenses lower than those of its peers.
It's also worth noting that Florida is projected to be one of the top cannabis markets in the United States. The State of the Legal Cannabis Markets report from Arcview Market Research and BDS Analytics has forecast $1.9 billion in annual weed sales for Florida by 2024. This would put Florida behind only Colorado and California in terms of annual sales four years from now.
Another core reason Trulieve deserves consideration as a buy is the fact that it's the most profitable pure-play pot stock of the bunch in terms of actual net income, not just earnings per share. During the third quarter, the company reported $70.7 million in sales, which puts it on track for more than $280 million in extrapolated annual weed sales. More importantly, cost of goods sold and operating expenses totaled $26.7 million and $20.6 million, respectively. This means Trulieve Cannabis generated an operating profit of more than $23 million for a single quarter without needing any help from fair-value adjustments or one-time benefits. No other marijuana stock even comes close to Trulieve's current operating income.
Trulieve also has sufficient cash on hand to fund its existing operations and expansion into California and Massachusetts. After ending September with $31 million in cash, the company wound up completing a debt deal that raised $61 million in gross proceeds. This pushed Trulieve's pro forma cash to just north of $100 million on Nov. 15, 2019. Given how difficult financing has been for U.S. pot companies recently, Trulieve's ability to generate positive operating cash flow, coupled with its healthy cash position, mean little to no worries about share-based dilution.
I believe it's also worthwhile to discuss Trulieve's valuation, which is another selling point of this pot stock. Not only is this the most profitable marijuana stock, but its forward P/E ratio of 15 is among the lowest in the entire industry. In fact, despite a growth rate that blows the benchmark S&P 500 out of the water, Trulieve Cannabis has a lower forward P/E than the widely followed index.
While Trulieve does have challenges to contend with, such as reestablishing its brand as dominant in the Sunshine State if and when recreational marijuana is legalized there, nothing supersedes the advantage of its mammoth Florida presence or of being the most profitable pot stock. Investors can buy Trulieve Cannabis with confidence in 2020.