Cresco Labs (CRLBF 2.02%) and Trulieve Cannabis (TCNNF 0.47%) are two of the biggest and most well-known cannabis companies in the U.S. However, their share prices have been faring very differently in 2020, with Trulieve down a modest 5% while Cresco's stock has crashed by 45% -- well below even the Horizons Marijuana Life Sciences ETF (HMLSF 0.69%), which has declined 33%. Let's take a closer look at whether Trulieve is still likely to outperform over the remainder of the year, or whether Cresco's larger loss makes it the more likely stock to achieve better gains from here on out.
Has Cresco Labs become too risky a stock to own?
Chicago-based Cresco Labs released its audited annual results on April 28, and the numbers weren't pretty. Although revenue of $128.5 million over the past year was triple the $43.3 million that the vertically integrated cannabis company generated in the previous year, Cresco actually ended up posting a significant net loss of $65.3 million in 2019, compared with a $3.1 million profit in 2018. Rising operating expenses and a smaller boost from changes in fair value were behind the results. Its net loss of $45.2 million in the fourth quarter was the largest the company has incurred since its founding in 2013.
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And with cannabis companies facing some serious challenges ahead, given that consumers might end up tightening their wallets during COVID-19, things may not get better for Cresco in future quarters. There are already signs that the company's outlook may not be as rosy as it was before.
For example, on April 27, Cresco announced it was backing out of a $282.5 million deal to purchase Tryke, a cannabis operator with locations in Nevada and Arizona. Cresco CEO Charlie Bachtell blamed the canceled transaction on a number of factors -- regulatory challenges, declining valuations in the industry, and COVID-19. The company is aware of the risks ahead and is adjusting its plans, and investors may want to do the same. Cresco could be in for a rough ride this year.
Trulieve continues pumping out profits -- but are they sustainable?
On April 8, Florida-based Trulieve released its annual results for 2019. Unlike Cresco, Trulieve's had no problem posting a profit, having done so in each of the past six quarters. But those figures don't come without an asterisk. In 2019, its net income of $178 million would've looked a lot different had Trulieve not benefited from fair value adjustments on inventory sold and growth of biological assets, which added nearly $200 million to the company's gross margin. In the previous year, when Trulieve recorded a profit of $27.9 million, fair value adjustments totaled $36.9 million.
The danger here for investors is that those fair value adjustments add a lot of noise to the company's financials and can make future earnings reports unpredictable, because they'll have a significant effect on the company's bottom line. Without significant (and positive) adjustments, Trulieve could easily land in the red. After backing out those items, the cannabis company's results don't look nearly as impressive. But one area where Trulieve sets itself apart from Cresco is in market share.
While Trulieve's sales came short of tripling in 2019, at $252.8 million in revenue for the year, the company generated nearly twice the sales that Cresco did during the past year. And what's impressive is that Florida's responsible for much of Trulieve's success, as 47 of its 49 locations are in the Sunshine State, where medical marijuana is legal but recreational use is not. The company announced on May 5 that its latest dispensary would be its fourth to open in the Orlando area. Outside of Florida, Trulieve also has operations in Connecticut, California, and Massachusetts. By comparison, Cresco Labs operates in nine states.
Why Trulieve's still the better buy today
Simplicity is important for the cannabis industry these days. Companies are scaling back growth and walking away from deals in an effort to cut down costs and keep their operations lean. Trulieve is heavily invested in a hot Florida market that's allowed the company to become one of the top pot stocks in the country without much expansion into other states, proving that a large national footprint isn't necessary to do well. And while COVID-19 may affect demand for cannabis, medical marijuana is less likely to see volatility than the recreational market, since it's more of a necessity. That means Trulieve may do well despite the pandemic. With more sales and a simpler operation, Trulieve is the safer stock to invest in today, and it's likely to continue outperforming Cresco Labs this year.
