Marijuana is still federally illegal in the U.S. -- but that isn't stopping the industry from growing. Currently, 11 states plus Washington, D.C., have legalized recreational marijuana, while 33 states and D.C. have legalized medical use.
Canada legalized cannabis far before the U.S., making medical cannabis legal in 2016 and recreational use in 2018. "Cannabis 2.0" products -- recreational derivatives such as edibles, vapes, beverages, and concentrates became legal there in 2019. U.S. cannabis stocks can often get sidelined in favor of the bigger Canadian players. However, these two U.S. marijuana stocks have my attention this year. Let me tell you why.
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Green Thumb: a rising cannabis star
If you want to expand your business, you need strategies for how to do so while keeping your balance sheet strong -- bigger cannabis players such as Aurora Cannabis (ACB 1.81%) have failed to take this vital step. But Green Thumb Industries (GTBIF 0.97%), with a market presence of 44 retail stores in 12 U.S. states, holds a good amount of cash to help it survive the COVID-19 crisis. In its first quarter, which ended March 31, GTI had cash and cash equivalents of $71.5 million on the balance sheet, with $92.9 million of total debt.
Interestingly, Green Thumb is also growing its revenue numbers. It recorded a whopping 268% year-over-year increase in revenue, to $102.6 million, in the first quarter. Revenue was also up 35.4% from the fourth quarter's $75.8 million. The money was being made in all 12 states where Green Thumb operates, with Illinois and Pennsylvania being the primary growth drivers.
Green Thumb's management thinks the Illinois market could grow to at least $3 billion in 2020, becoming an excellent revenue growth stream. Currently, it has seven stores operating in the state, with a license for three more. Illinois, which legalized adult-use marijuana on Jan. 1, saw $37.3 million in legal weed sales in April.
Positive profitability
While most Canadian cannabis peers are struggling to hit profitability, Green Thumb reported an adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) profit of $25.5 million in Q1, compared with a loss of $2.1 million in the year-ago period. Sequentially, these results are also a step up from a profit of $13.8 million in the fourth quarter of fiscal 2019, depicting improvement in the company's handling of operating expenses.
Green Thumb gives customers access to a diversified range of products including skincare products, vape pens, edibles, and many more. It opened three new stores in Illinois and Pennsylvania in Q1 and added one each in Ohio and Nevada after quarter's end, bringing its current total to 44. Green Thumb's commitment to strategic expansion and delivering quality products while keeping its balance sheet strong is what's driving its revenue and profitability.
Curaleaf: Revenue keeps rising
Another intriguing cannabis pick in the U.S. is Curaleaf Holdings (CURLF 0.86%), which in its most recent results showed an 174% year-over-year increase in revenue, to $96.5 million, a sequential increase of 28%. Investors did not take the Q1 results well, as the company missed top-line consensus estimates. But Curaleaf did report an adjusted positive EBITDA of $20 million against a loss of $2.8 million in Q1 2019.
Curaleaf attributes its Q1 revenue growth to organic expansion, new stores in Massachusetts, Florida, and New York, and its strategic acquisitions in Arizona and Nevada. For the quarter ended March 31, Curaleaf had $176.4 million of cash and $281.5 million of outstanding debt.
Management at Curaleaf believes Illinois and Pennsylvania to be the fastest-growing cannabis markets in the U.S. To grab on to the opportunity, they intend to expand in those states through the acquisition of another vertically integrated cannabis company, Grassroots, which is expected to close by the end of Q2. Grassroots has a strong market presence with 63 dispensary licenses in the Midwest. Curaleaf also expects to expand into Arkansas, North Dakota, and Vermont with Grassroots's help.
With the reopening of adult-use stores in Massachusetts after their closure for COVID-19, the company expects to meet demand and grow revenue further in the second quarter. Declaring the company "firmly focused on operational excellence to drive both top and bottom-line results in 2020," Curaleaf management intends to expand its dispensaries to 100 across 22 states by year-end.
April looked good for legal states, and more is coming
The U.S. cannabis industry is poised to grow, with more states pushing to legalize some form of medical or recreational cannabis. Most of the U.S. areas where marijuana is legal, including California, Washington, D.C., and Illinois, saw a surge in sales in April, the first month of complete lockdown. Meanwhile, growth from the Canadian industry looks bleak after the Canadian Imperial Bank of Commerce slashed its marijuana sales forecast for 2020, noting that headwinds including slow store rollout might continue this year.
COVID-19 is the twist!
The expansion plans for both Curaleaf and Green Thumb are intriguing, but there's a big twist this year: COVID-19. The uncertainty of the pandemic means that what matters more now is seeing companies work efficiently to conserve cash to stay afloat, rather than ramping up with acquisitions.
That said, I still think U.S. cannabis stocks like including and Curaleaf present a good buying opportunity if you are looking for investments that will bear fruit in the long term. Shares of Green Thumb and Curaleaf are up 41% and 39%, respectively, so far in May, while the SPDR S&P 500 ETF (SPY 1.52%) has gained 4.4%. I think as the coronavirus continues to take its toll, these are two cannabis companies that may survive and even thrive.
