While the healthcare sector is fighting to reach the finish line of finding a cure for coronavirus and putting an end to the worldwide misery it causes, cannabis is proving relief to people dealing with this crisis. This has put the cannabis sector in the limelight again -- not only highlighting the medical benefits of marijuana, but also giving an idea about the potential of this sector.
The sudden surge in marijuana sales amid the pandemic helped cannabis companies' revenues to skyrocket. Among the Canadian pot stocks, in my opinion, Aphria (APHA) is in the best position, while Curaleaf Holdings (CURLF -2.43%) and Green Thumb Industries (GTBIF -2.91%) are the top U.S. cannabis players now.
While not every cannabis company has benefited, let me tell you why these three could not just survive the crisis but expand and become top players once all is back to normal.
Image source: Getty Images.
Aphria has been consistently profitable
Compared with its Canadian peers Aurora Cannabis, HEXO, and Canopy Growth, which still have been reporting negative earnings, Aphria is in a safe place. The company's management believes in playing the game quietly -- focusing on developing its business in its core market, Canada, while consistently reporting positive EBITDA (earnings before interest, tax, depreciation, and amortization) over the past three quarters. It saw a positive adjusted EBITDA of 5.7 million Canadian dollars in its recent third quarter.
The importance of a strong C-suite leadership team is evident from Aphria's success. The company's CEO, Irwin Simon, has changed the face of the company, which in 2018 dealt with many allegations from short-sellers. The focus on the core business -- without burning cash on acquisitions -- has played out well for Aphria. It ended the quarter with CA$515.1 million of cash and cash equivalents, along with an additional CA$100 million in equity capital, while HEXO and Aurora are having to dilute their stock to raise cash.
Aphria didn't even have to opt to cut down costs with layoffs amid the COVID-19 crisis, while Canopy Growth and Aurora Cannabis had to do that for survival.
Whether Aphria continues to outperform in this profitability race will be clear from its fourth-quarter results July 29.
Curaleaf and Green Thumb: outstanding ability to expand during a crisis
Curaleaf's growth up until now has been remarkable. It has consistently grown its revenue and achieved positive EBITDA for the past four consecutive quarters.
Despite the ongoing crisis, it continued to grow its revenue sequentially by 28% and its adjusted EBITDA by 45% in first-quarter 2020. Revenue in the first quarter showed triple-digit growth of 174% to $96.5 million, while adjusted EBITDA came in at about $20 million.
Its Select brand portfolio, a cannabis oil brand that it acquired in February, is now popular in nine U.S. states -- Colorado, Oregon, Nevada, Michigan, California, Maryland, Oklahoma, Arizona, and Connecticut, the latter of which it entered in June. The company will add Maine, Massachusetts, Ohio, and Florida to the list by August.
Currently, Curaleaf has its mark on 18 states with 57 dispensaries, 15 cultivation sites, and 24 processing sites. Its Grassroots acquisition will allow the capture of even more markets. As of March 31, Curaleaf had $176.4 million in cash, giving investors confidence in its ability to withstand the crisis and grow ahead. We will know more of its growth initiatives for 2020 in its second-quarter results, due to be released on Aug. 17.
Green Thumb's presence in 48 stores in 12 U.S. markets, while holding licenses for 96 retail locations, is what makes it an interesting choice. Its rapid expansion continues despite the pandemic. It opened several stores in Illinois, Pennsylvania, and Nevada over the past two months, and holds licenses to open six more stores in Nevada. The rising cannabis sales from the new legal market in its home state, Illinois, are boosting the company's revenue; in its recent first quarter, it saw whopping 268% revenue growth year over year to $102.6 million, with positive EBITDA of $25.5 million. Cannabis demand is still strong in the U.S., including in Illinois, which reported record-breaking sales in June. We can expect to see strong revenue and another quarter of positive EBITDA in Green Thumb's second-quarter results, to be released Aug. 12.
The Illinois market still has a lot of room to grow. Moreover, more states are on the verge of legalizing marijuana in 2020, and new "cannabis 2.0" products (edibles, vapes, beverages, concentrates, and more) give both of these pot companies more opportunities to combine with their solid amounts of cash on hand. So far in July, shares of Aphria, Curaleaf, and Green Thumb have gained 19.9%, 20.1%, and 19.7%, respectively. Comparatively, the market as tracked by the SPDR S&P 500 ETF is up 4.6% in the same period.
Data source: YCharts.
Worth the risk?
Cowen and Company analyst Vivien Azer estimates the U.S. marijuana industry will grow to generate close to $85 billion in sales in 2030. Research by Cowen shows that the headwinds faced by the pot industry now could become a positive catalyst at a later stage. Curaleaf and Green Thumb, which are in a solid financial position now, will have an added advantage when the pandemic retreats. The launch of more cannabis derivative products in 2020, with a huge demand in both Canada and the U.S., will bring in more revenue.
The marijuana sector is for investors who are willing to take the risk and have the patience for this industry to show its true potential. I feel these three pot stocks are worth that risk.
