Chicago-based Cresco Labs, founded in 2013, is a pure-play cannabis company that recently expanded again with its purchase this past February of Hope Heal Health, giving it access to the market in Massachusetts. The company also expanded this year in Ohio, where it now operates five dispensaries, the maximum the state allows. Cresco also expanded its cultivation and manufacturing plant in Brookville, Pa., to 88,000 square feet.
The company has a portfolio of products that it sells wholesale and in its dispensaries, with segments including flower, live concentrates, and liquid live resin, such as pre-rolls, gummies, and CBD oil.
Canada's Village Farms International, meanwhile, has been around since 1989 and is headquartered in Delta, British Columbia. It was strictly a greenhouse produce company (think tomatoes) until it formed a pivotal partnership three years ago to produce recreational cannabis products.
While the companies came to cannabis in different ways, they are both focusing on growth to fuel revenue. However, Cresco's share price has risen more than 9% year to date, while Village Farms' has dropped more than 15%. Is this a short-term trend or a long-term one for the two marijuana stocks?
The case for Cresco Labs
It's been a wild ride for Cresco Labs investors this year, with the stock dipping as low as $2.15 a share in mid-March but now above $7.
If you saw the company's second-quarter report, which covered the three months ending June 30, you're likely surprised the stock isn't even higher. With nine dispensaries in its home state of Illinois, and another one planned, the company has really been in the right place at the right time -- the state opened up to recreational cannabis use on Jan. 1. Cresco has 19 dispensaries overall, located in nine states. The company's third-quarter report is due Nov. 18.
In September, Illinois reported a record $99 million in cannabis sales, of which $67 million was for recreational use -- quite a jump from the $40 million of adult-use cannabis that was sold in January.
In the second quarter, Cresco reported revenue of $94.3 million, a rise of 42% over the previous quarter. The company said it still lost $4.3 million in the quarter, but compared with the $13.4 million it lost in the first quarter, you can see it is on its way to profitability. In the second quarter, the company cited increased scalability and greater profit margins for the improvement in net income.
A key for any cannabis company at this stage in the nascent industry is raising sufficient capital. Cresco had $73.8 million in cash at the end of the second quarter, an improvement of nearly $2.5 million from the first.
The case for Village Farms International
Village Farms International's share price is down more than 25% year to date. The reason is simple: This past quarter, despite increased revenue, the company went from making money to losing it.
In the second quarter, which ended June 30,Village Farms posted a record $47.5 million in revenue, a jump of 15% year over year. However, the company lost $119,000 in net income, compared with positive net income of $3.7 million in the same quarter in 2019.
Village Farms didn't begin as a cannabis company, but it has a chance to be a big player in the industry. The company was a wholesale grower of tomatoes, cucumbers, and bell peppers until it formed a partnership with Emerald Health Therapeutics in 2017 for wholesale marijuana production, naming the combined venture Pure Sunfarms. When Canada approved recreational pot sales in October 2018, the partnership began to face growing competition from both legal and illicit sellers, cutting into profits.
Still, it is a profitable entity, and as an owner of 58.7% of the joint venture, Village Farms has benefited from Pure Sunfarms' six consecutive quarters of positive net income and seven consecutive quarters of positive earnings before interest, taxes, and amortization (EBITDA). In Ontario, Pure Sunfarms is the leading seller of dry flower product, and the company is beginning to expand in Canada's other provinces.
On Monday, Village Farms bought up the remaining shares of Pure Sunfarms from Emerald Health Therapeutics for $61 million, giving it control of Pure Sunfarms' greenhouse in British Columbia that produces dried flower, cannabis seeds, prerolls, vape cartridges, and CBD oil.
Village Farms is in a strong position to outlast and outsell other competitors thanks to its huge capacity -- it's got 9 million square feet of greenhouses in British Columbia, Texas, Ontario, and Mexico. As it stands right now, the level of competition, both legal and illegal, in Canada has kept the price of cannabis low, but sales of "Cannabis 2.0" products -- which include cannabis-infused food and drink and concentrates for vaporizers and topical solutions -- are poised to take off in Canada, and Village Farms already has products lined up for that market.
The better pot stock?
In the short term, there's little question that Cresco gets the nod. It's worked itself into a dominant position in Illinois, and its strong cash balance should allow it to grow in other markets as well. It also has has its own dispensaries and stronger brand recognition, whereas Village Farms International (through Pure Sunfarms) supplies recreational-use dried cannabis products to wholesalers.
In the long term, though, the better stock is more of a toss-up.
Cresco is better positioned in the larger U.S. market, while Village Farms has a strong foothold in the less profitable Canadian market. However, Village Farms may be a better long-term choice based purely on its immense production capability, especially if it moves into the U.S. market in cannabis if (or when) the substance is legalized at the federal level.