November is a potentially big month for the U.S. marijuana industry. With Election Day just two days away, we could see up to five states waving the green flag on adult-use cannabis or medical marijuana. A green sweep on Nov. 3 would mean 36 states have legalized medical pot, with 15 of those also allowing recreational weed consumption and/or sale.
There's little question that marijuana has the potential to be a fast-growing, moneymaking industry this decade. However, investors are finding out that they need to be exceptionally picky in a largely unproven industry (at least from the standpoint of being regulated). But that doesn't mean there aren't bargains available to investors.
My top marijuana stock to buy in November should excel no matter who wins the presidency or what the political makeup of Congress looks like come 2021. Ladies and gentlemen, say hello to Trulieve Cannabis (TCNNF -2.99%).
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Even top stocks face growth challenges
As is customary when I lay out my thesis for a pot stock as a top buy in a given month, let's first take a look at some of the challenges Trulieve Cannabis investors might contend with.
Arguably the biggest concern for Trulieve is the company's single-state reliance. Though it has a presence in four states, with a fifth pending via acquisition, 64 of the company's 66 operational dispensaries are located in Florida. The medical marijuana-legal Sunshine State has become quite the battleground for well-known vertically integrated multistate operators (MSO). Trulieve is being forced to go toe-to-toe with the likes of Curaleaf Holdings, Liberty Health Sciences, and MedMen Enterprises.
What's concerning about this single-state focus is the likelihood of an adult-use legalization constitutional amendment appearing on the ballot in Nov. 2022. You might be thinking, "Hey, isn't that great news for an MSO that holds a clear-cut retail advantage in the Sunshine State?" While the answer is possibly yes, we don't know how lawmakers will frame the language regarding licensing in a recreationally legal environment, assuming a statewide constitutional amendment becomes law. This is to say that recreational sales could cannibalize medical weed sales beginning in 2023, and Trulieve isn't guaranteed to have a smooth transition into an adult-use-legal environment.
Trulieve Cannabis has also been the target of a short-seller report from Grizzly Research. The short-side firm, which may hold a short position in the companies it reports on, alleged in December 2019 that Trulieve produces low-quality cannabis, has suspicious profits, and "extensive ties" to investigations being conducted by the Federal Bureau of Investigation. For its part, Trulieve has denied these allegations, and I don't see them having merit. Nevertheless, there have been enough bad apples in the basket in the cannabis space that short-seller reports carry weight.
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Here's why Trulieve Cannabis should be on your buy list
Now that we've taken a closer look at the biggest concerns facing Trulieve Cannabis, allow me to dig into the meat and potatoes of why it should be your top marijuana stock to buy in November.
Easily the most exciting reason to buy into the Trulieve growth story also happens to be its biggest concern: The focus on Florida. Having 64 retail stores open in Florida has allowed the company to gobble up approximately half of the state's medical marijuana market share. To put this into some context, estimates have called for Florida to generate the third-highest marijuana sales in the country by 2024 at $1.9 billion. This means Trulieve has half of the market share in the third-biggest marijuana market in the country. That's a lucrative position to occupy.
Another point of intrigue with Trulieve is that it's the most nominally profitable pot stock in North America. By nominally profitable I mean with regard to total income generated, as opposed to on a per-share basis. Through the first six months of 2020, Trulieve delivered $216.8 million in net sales, a gross profit of $158.2 million, and operating income without the aid of fair-value adjustments of $89.9 million. No other pure-play pot stock is delivering the green quite like Trulieve.
What makes the company so successful is this laser focus on the Florida market. It's having little issue building up the value of its brand with Floridians, which is, in turn, saving the company money on the marketing front. With each new location, Trulieve is becoming more efficient at reaching medical marijuana patients in Florida.
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It's also worth mentioning that these medical pot patients are exceptionally loyal to Trulieve. The company announced a 76% customer retention rate during the second quarter, and is seeing the average patient visit roughly 2.8 times per month. What's more, the typical patient spent $3,900 annually at Trulieve in 2019, which was up more than $1,100 from the average annual spend for patients in 2018. Every pertinent metric you can think of, including same-store sales growth, has been heading in the right direction.
Over the longer run, Trulieve also has the opportunity to enter new markets via a wholesale platform. Many of its proprietary products developed for the Florida market could sell well in markets like California, Connecticut, Massachusetts, and Pennsylvania (assuming its pending acquisition goes through).
The point is, most North American cannabis companies are still chasing recurring profits. Trulieve has been there for a while, and is absolutely dominating the Florida market. With little in the way of election uncertainty for the Florida market, Trulieve Cannabis looks to be a no-brainer marijuana stock to buy for November.
