Many pot stocks are struggling to stay afloat this year, and many will have to shut down due to COVID-19 and the recession that the pandemic has caused. But for the industry leaders and companies that have been performing well, 2020 could be a year when they set themselves further apart from the pack. Below are two dominant players that could soon become scorching-hot buys.
1. Trulieve
Trulieve Cannabis (TCNNF 3.42%) has always been one of the safer pot stocks to invest in, for many reasons. First and foremost is the company's focus on the Florida medical marijuana market. It's one of the hottest pot markets outside of California; Florida's a popular state for seniors, and it has more than 350,000 registered medical marijuana patients. And with only two of the company's 52 dispensaries located outside the Sunshine State, it's at the core of Trulieve's strategy.
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That strategy's been paying off for Trulieve. In 2019, the company saw its sales numbers more than double, soaring from $102.8 million to $252.8 million. What was even more impressive is that it accomplished such growth even while staying profitable. As pot stocks have struggled to stay out of the red, Trulieve's been able to post profit after profit with relative ease. In seven straight quarters, Trulieve's finished in the black, and it has incurred an operating loss in only one of those periods.
That stability and consistency help make Trulieve stand out from its peers. If the markets crash, cannabis investors may be looking for safe places to store their money -- and Trulieve could be an attractive option. It's not just because Trulieve is stable that investors could flock to the Florida-based cannabis producer; the stock's also cheap compared to many of its rivals:
TCNNF PS Ratio data by YCharts
At a relatively modest price-to-sales multiple of less than 5, Trulieve gives investors quite a bit of value for their money.
The company's focus on medical marijuana is also appealing because it could make its business more resistant during a recession. Even amid the COVID-19 pandemic, Trulieve's still produced strong growth. In its first-quarter earnings of 2020, which the company released on May 20, Trulieve posted a net income of $14 million. Its sales of $96.1 million were up 21% from the fourth quarter and more than double the prior-year period's tally of $44.5 million.
With strong growth, a decent valuation, and profitability, there's a lot to like about Trulieve, and it could be one of the better pot stocks to buy in 2020.
2. Canopy Growth
Canopy Growth (CGC +0.00%) isn't as stable or as sure of a thing as Trulieve is. For one, it's largely dependent on a smaller Canadian cannabis market. It has a presence in the cannabidiol (CBD) hemp market in the U.S., but that's a competitive segment of the market and one that isn't likely to drive a lot of growth.
Sales growth hasn't been a big problem for Canopy Growth. The company released its 2020 fiscal year results on May 29, and sales for the year were up 76% from fiscal 2019. Instead, it's the company's mounting losses that have been turning investors away. The Ontario-based cannabis producer incurred a net loss of 1.3 billion Canadian dollars on net revenue of CA$398.8 million. And in 2019, its net loss was CA$736.3 million.
Even though the company burned through CA$772.6 million from its operating activities during the past year, that's not a terribly big concern for investors given that Canopy Growth still had CA$1.3 billion in cash and cash equivalents as of March 31. And with Constellation Brands (STZ +0.01%) owning a 38.6% stake in the cannabis company, Canopy Growth has even more resources at its disposal should it run into trouble. But for the company to prove to be a viable long-term investment, it needs to show investors that it can be profitable. That's where its new CEO comes in.
A big reason to be bullish on Canopy Growth is that its new CEO, David Klein, who took over this year and came over from Constellation, is in full cost-cutting mode. In addition to laying off staff, the company's pulled out of operations in South Africa and Lesotho and scaled back its business in other parts of the world.
In the fourth-quarter earnings release, Klein said that the company has "a renewed strategic focus and a clear change agenda that is already under way." Canopy Growth reiterated its focus on profitability and said that the new fiscal year will be one of transition. While those aren't exciting words for shareholders to hear, they are necessary to help investors temper their expectations.
As Klein continues to tighten up the company's financials and slowly improves Canopy Growth's bottom line, it could go a long way toward winning back investors, and that could be key to getting the stock back onto a positive trajectory. Things in the cannabis industry can change quickly. And if expectations are low and Canopy Growth posts an improved quarter later this year, perhaps even a profitable one, its shares could take off in a hurry.
Which stock is the better buy today?
Here's a quick look at how the two cannabis stocks have done this year compared with the industry and the S&P 500:
Even though Canopy Growth's suffered a large decline of more than 20% so far this year, it's still the more expensive stock when looking at price-to-sales. It could still bounce back, but there are likely more obstacles in its way than there are for Trulieve. If you have to pick one, go with the Florida-based cannabis producer for a bit more safety. But either way, both of these pot stocks look to be solid buys in 2020.
