Murphy's Law might need a cannabis corollary. What can go wrong for marijuana stocks will go wrong for marijuana stocks.
This corollary seems to be applicable to both KushCo Holdings (KSHB) and Green Thumb Industries (GTBIF -2.44%). KushCo's shares have plunged 40% year to date, while Green Thumb's shares are down over 30%. But brighter days could be ahead for both of these stocks. Which is the better pick for long-term investors?
The case for KushCo Holdings
Let's first look at the challenges that KushCo faces. The company remains unprofitable and posted a $12.5 million loss in its latest quarter. Health concerns about vaping are especially problematic for KushCo, with over 60% of the company's total revenue stemming from vape products.
Now, the good news: These should be only temporary issues for KushCo. The company expects to deliver positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by the second half of the current fiscal year, which ends on Aug. 31, 2020. It's helped that KushCo has cut costs significantly.
There are also signs that the vaping health scare is fading away. The Centers for Disease Control and Prevention (CDC) has narrowed the potential causes of illnesses and deaths stemming from vaping. Worries that more states would implement vaping bans have largely subsided. And headlines about the coronavirus outbreak have pushed vaping concerns to the side.
Perhaps most importantly, the fundamental long-term growth prospects for KushCo appear to be strong. Large states, such as Illinois and Michigan, have legalized adult-use recreational marijuana. The medical cannabis markets in several states are still in their early stages and continue to expand. In addition, more states could legalize marijuana this year. All of this should drive higher demand for KushCo's packaging products, with new recreational markets fueling demand for its vape products.
KushCo also sells hydrocarbons and solvents used in extracting cannabinoids from cannabis plants. The U.S. hemp CBD market is still in its infancy. If legislative efforts to revise federal regulations to allow hemp CBD dietary supplements are successful, KushCo's extraction business should experience a nice sales bump.
The company could also benefit from the growth of Canada's Cannabis 2.0 market. New products in this market include cannabis-infused edibles, beverages, and vapes, all of which rely on the extraction of cannabinoids from cannabis plants.
The case for Green Thumb Industries
While KushCo's headwinds explain why its stock has stumbled this year, it's a different story for Green Thumb Industries. By all counts, the marijuana stock should have enjoyed nice gains in the first couple of months of 2020.
GTI is based in Chicago and stands as a leader in Illinois' adult-use recreational marijuana market that opened on Jan. 1, 2020. The launch of this market has gone very well so far, with per-capita recreational marijuana sales in the first month surpassing all but one state.
The company currently operates six retail cannabis stores in its home state. Industry observers project that the recreational pot market in Illinois could top $2.5 billion annually at peak sales. GTI is in a good position to claim a significant share of that potential market.
Illinois isn't GTI's only big opportunity, though. The company has a presence in four of the five hottest marijuana markets in the U.S. In total, GTI operates 13 production facilities and has 41 retail cannabis stores in 12 states.
That's where things stand now. GTI owns 55 additional retail cannabis licenses. It's likely to expand into additional legal cannabis markets in the future.
GTI's revenue soared 52% quarter over quarter in Q3 to $68 million. The company also generated positive adjusted operating EBITDA of $14.1 million and positive EBITDA of $1.6 million. With the prospects of continued revenue growth, GTI appears to be on a solid path to profitability.
Better marijuana stock
I like the long-term prospects for both of these U.S.-based marijuana stocks. If I had to pick only one, though, it would be Green Thumb Industries.
GTI's presence in key cannabis markets in the U.S. is a big plus. The company's progress toward reaching profitability is even better and its growth opportunities are huge. My view is that GTI ranks as one of the more attractive pot stocks on the market right now despite its weak start in 2020.