Throughout 2020, tech stocks have dominated discussion within the investment community. But when it comes to high-growth potential, don't discount cannabis.
There's no question that expectations got way ahead of reality for the pot industry in 2019. Canada's regulatory issues completely destroyed its chance to be the global cannabis leader. Meanwhile, high tax rates in select legalized states have constrained legal-channel sales in the United States.
But this long overdue shakeout isn't all bad news. We've witnessed a handful of financially strong and operationally efficient pot stocks and ancillary players emerge in recent months.
As we enter the homestretch for 2020 and near Election Day in the U.S., here are four marijuana you should consider buying for the fourth quarter and beyond.
Green Thumb Industries
Green Thumb currently has 49 operational dispensaries, but holds enough licenses to open 96 total retail locations in a dozen states. It's been busy opening up stores in Illinois, which officially began the sale of recreational cannabis on Jan. 1, 2020, and bought its way into the Nevada market through the acquisition of Integral Associates last year. By mid-decade, Nevada's tourist-heavy economy should allow the Silver State to lead the country in cannabis spending per capita.
But the single most important thing about Green Thumb is that close to two-thirds of the company's revenue is derived from derivatives (i.e., non-dried-flower product, such as edibles, vapes, and infused beverages). Dried cannabis is easily commoditized and generally produces so-so margins. Comparatively, derivatives are a higher-priced, higher-margin product that'll play a key role in pushing Green Thumb to recurring profitability by late 2020 or early 2021.
As one last note, look for Green Thumb to be the second marijuana stock in North America, behind Curaleaf, to eventually reach $1 billion in annual recurring sales.
Planet 13 Holdings
I'm a huge fan of marijuana stocks that can stand out in a crowded industry, and U.S. MSO Planet 13 Holdings (PLNH.F -3.61%) does just that.
Whereas many of its peers are planting their proverbial flags in multiple legalized states, Planet 13 has developed a business model that's turned it into the Disneyland of cannabis. It has only one operational store at the moment, but it's a doozy. Located just west of the Las Vegas Strip in Nevada, the Planet 13 SuperStore spans 112,000 square feet -- that's 7,000 square feet larger than the average Walmart -- and includes a restaurant, events center, consumer-facing processing center, and dozens upon dozens of counters filled with dried flower, derivatives, and paraphernalia. There's no other pot shop in the U.S. like it.
Having visited the SuperStore firsthand while on vacation in April 2019, I can attest that it's built for success. Planet 13 has incorporated technology throughout the store, including self-pay kiosks to expedite transactions. The layout is also highly engaging to consumers, with an immersion station located at the center of the retail department.
Planet 13 is currently building out a second location (40,000 square feet) in Santa Ana, Calif., that'll be about 10 minutes from tourist mecca Disneyland. If this second store proves as successful as the Las Vegas SuperStore, the blueprint will be set in stone.
So nice I'll do it thrice -- how about another U.S. MSO? Given the advantageous growth outlook for U.S. marijuana stocks, relative to our neighbor to the north, MSO Cresco Labs (CRLBF -2.87%) looks like a particularly smart portfolio addition for Q4 and beyond.
The Cresco Labs growth story revolves around two major catalysts. First, there's the company retail footprint. Cresco only has 29 total dispensaries licenses spanning nine states, so it's not going to have nearly the same retail presence as Green Thumb. It does, however, have nine of its 19 operational dispensaries in Illinois. Since the Land of Lincoln is a limited-license state, Cresco and Green Thumb should have little trouble carving out a healthy percentage of annual statewide sales. By 2024, Illinois' annual weed sales should top $1 billion.
The second major catalyst for Cresco is the company's wholesale business. Generally speaking, wholesale cannabis is a low-margin operation that's dependent on volume. The good news is that Cresco has all the volume it can handle thanks to its Jan. 2020 acquisition of Origin House. You see, Origin House held one of only a few cannabis distribution licenses in California, the largest marijuana market in the world by annual sales. With Origin House now an owned entity, Cresco can place its products into more than 575 California dispensaries.
Cresco Labs will likely be third in line to reach the $1 billion sales plateau, and it could be profitable on a recurring basis by as soon as next year.
Finally, for a break from the MSOs, I suggest you consider buying into hypergrowth ancillary player GrowGeneration (GRWG -5.41%). GrowGen, as the company is known, has 28 operational stores spanning 10 U.S. states, but envisions having 50 open locations by the end of 2021. It provides hydroponic equipment, as well as lighting, soil, and nutrients to indoor cannabis cultivators.
Though all eyes are on the direct players, GrowGen happens to be keeping up with or even outpacing them in the growth department. Over the previous six quarters, the company has yielded respective year-on-year sales growth of 199%, 172%, 159%, 180%, 152%, and 123%. Yes, new store openings and acquisitions have played a role in this growth. But even stripping out new stores and acquisition, same-store sales growth totaled 49% in the second quarter. Online sales also surged 149% from the prior-year period.
Speaking of acquisitions, smart dealmaking has played a key role in GrowGen's success. The company has made close to a dozen acquisitions since its 2014 inception, which have expanded its reach in legalized states and bolstered its product portfolio.
With GrowGeneration already profitable, it should be a logical beneficiary to a growing U.S. pot industry. With estimates from Marijuana Business Daily's latest "Marijuana Business Factbook" calling for up to $37 billion in legal sales by 2024, GrowGen will play a key role boosting crop yields and keeping costs down for cultivators.