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These 3 Cannabis Stocks Have a Head Start in Arizona and New Jersey

By Jim Halley - Dec 5, 2020 at 7:40AM

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The states are the two largest markets about to open to adult-use marijuana.

Harvest Health & Recreation ( HRVSF ), Curaleaf Holdings (OTC:CURLF), and Acreage Holdings (OTC:ACRGF) are moving quickly to cash in on new markets after citizens in Arizona and New Jersey voted to permit adult-use cannabis sales next year.

Companies that already have medical marijuana dispensaries in those states will have an edge. In Arizona, Proposition 207, the ballot referendum that was passed allowing adult-use marijuana sales, puts existing medical-marijuana dispensaries at the front of the line when applying for adult-use licenses. Adult-use sales could begin as early as March. The state has allowed medical-use marijuana since 2010 and it has 130 dispensaries, including drive-thru dispensaries.

In New Jersey, medical marijuana has also been legal since 2010, but the rollout has been slower. The state has 9 million residents, but there are only 13 medical-use dispensaries in operation.

New Jersey residents approved Public Question 1, which amended the state constitution to allow recreational-use marijuana sales. The referendum leaves it to the state to write exactly how that will work, and the state's legislators have been working on Bill S21 to regulate the process. The state assembly's version of the bill would cap the number of marijuana growers in the first two years; the Senate's version of the bill would not.

Here's why Curaleaf, Harvest Health & Wellness, and Acreage Holdings are poised to benefit from the new laws more than other cannabis stocks in Arizona and New Jersey.

Marijuana leaf sitting on a smattering of $100 bills.

Image source: Getty Images.

Curaleaf is in a strong position to grow in both states

Curaleaf, as measured by revenue, is the largest cannabis company in the United States. It has 93 dispensaries in 23 states, including 22 cultivation sites and 30 processing locations.

In New Jersey, its Bellmawr campus is the largest alternative treatment center in the state. The company already has three licenses to operate dispensaries there and plans for a second medical-use dispensary in Bordentown. In addition, the company, which has 35,000 square feet of cultivation space in New Jersey, provides wholesale sales to other dispensaries in the state.

In Arizona, Curaleaf has nine licenses and eight operating dispensaries, which makes it the second-largest cannabis operator there. It has 119,500 square feet of cultivation space in the state.

In February, it purchased the Select Brand, and in July it completed its purchase of Grassroots, giving it access to markets in six new states.

In the third quarter, Curaleaf reported revenue of $182.4 million, a 195% increase year over year. Earnings before interest, taxes deprecation, and amortization (EBITDA) in the quarter were listed at $42.2 million, a 51% rise over the same period in 2019. That growth comes at a price, however, as the company lost $9.3 million in the quarter, up from a $6.3 million loss in the same period last year.

It is in a strong cash position with $84.6 million reported as of Sept. 30, and has reported five consecutive quarters of positive adjusted EBITDA.

HRVSF Chart

HRVSF data by YCharts

Harvest Health & Recreation is on the rise

Harvest Health & Recreation operates 38 dispensaries in seven states, including 15 in Arizona, the most in the state. It recently obtained three additional licenses in Arizona, meaning it could have 18 operating dispensaries soon.

Harvest said it should be able to ramp up adult sales quickly in Arizona, with little additional costs, because it already has the retail locations and employees in place.

The company's third-quarter revenue was reported as $61.6 million, up 86% year over year and 11% over the prior quarter. The company's earnings before EBITDA were $10.5 million, up 156% compared to the $4.1 million in the prior quarter.

Harvest seems to be marching toward profitability as well, with a net loss of $2.1 million in the quarter, compared to a net loss of $39.1 million in the same period in 2019, and $18.3 million in the second quarter of 2020. In its third-quarter earnings call, management said it intends to tighten the company's operations to focus on four states: Arizona, Pennsylvania, Florida, and Maryland.

Acreage Holdings has an ace card

Acreage Holdings operates in 15 states with 71 dispensaries and has a large growing facility in Egg Harbor, N.J., which it said it plans to expand to meet the expected demand for adult-use marijuana in the state. It also has dispensaries in Egg Harbor, and this past February, opened one on the Atlantic City Boardwalk.

In the third quarter, Acreage reported revenue of $31.7 million, a 42% rise over the same period in 2019, but well behind the quarterly revenue of the other two companies. Like those two, Acreage lost money in the quarter -- $35.7 million. That's a slight improvement from the $38.7 million it lost in the third quarter of 2019.

What makes Acreage Holdings a potentially bigger presence in New Jersey is that if marijuana is legalized at the federal level, it has an agreement in place, which it recently amended, to be acquired by Canopy Growth ( CGC -7.19% ), which is the largest cannabis company in the world by market cap ($10.7 billion). Canopy, a Canadian company, and Acreage are already partnering on a plan to release cannabidiol (CBD)-infused beverages in the United States by next summer, starting with Illinois and California.

Looking ahead, what's the best move?

The shares of the three stocks are up considerably for the year, which may say more about the public's enthusiasm for the potential of the pot industry than anything else.

Of the three, I like Harvest Health & Recreation the most. It appears to have the quickest route to making a profit. It also has a home-state edge that will serve it well. Even if bureaucracy slows the growth of adult-use recreational marijuana in Arizona, the company already has a strong footprint in medical marijuana.

After that, it's hard to bet against Curaleaf because of its size and because it is so well situated in New Jersey and Arizona. Acreage Holdings is also more of a wild card because of its still-tenuous connection to Canopy. That's more of a what-if possibility, and the other two stocks are closer to surer bets.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Curaleaf Holdings, Inc. Stock Quote
Curaleaf Holdings, Inc.
CURLF
$8.97 (-5.99%) $0.57
Canopy Growth Stock Quote
Canopy Growth
CGC
$9.94 (-7.19%) $0.77
Acreage Holdings, Inc. Stock Quote
Acreage Holdings, Inc.
ACRGF
Harvest Health & Recreation Inc. Stock Quote
Harvest Health & Recreation Inc.
HRVSF

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