Two of the hottest pot stocks to hold in 2020 were Green Thumb Industries (GTBIF -3.27%) and Curaleaf (CURLF -3.85%). They soared 159% and 93%, respectively, while the S&P 500 was up just 15%. Both of these stocks could be headed for even more gains this year as they continue growing. After five more states passed marijuana reform in November, new markets are set to open in the near future.
But there isn't a whole lot separating these two companies right now, making it difficult to determine which one is the better investment. To help investors pick just one, I'll look at their recent results, their strategies, and their respective valuations.
1. A look at their recent numbers
Green Thumb released its third-quarter earnings report on Nov. 11, 2020, for the period ending Sept. 30, 2020. Sales of $157.1 million grew at an impressive rate of 131% from the prior-year period. Its year-to-date sales of $379.3 million were more than double the $140.6 million the Illinois-based business posted a year ago. The company credits its growth simply to scaling its operations in its consumer packaged goods and retail businesses. And with more potential markets to enter in 2021, it's likely that these trends will continue this year. Four states -- Arizona, Montana, New Jersey, and South Dakota -- all legalized recreational pot this past November. And CEO Ben Kovler singled out New Jersey as a particularly appealing market, noting that it "has the potential to mirror Illinois." The Prairie State posted $1 billion in legal marijuana sales (both recreational and medicinal) in 2020.
Less than a week later, on Nov. 17, 2020, Curaleaf reported its third-quarter results for the same period, and its revenue of $182.4 million was even higher and grew 195% year over year. Over the nine-month period ending Sept. 30, 2020, its revenue totaled $396.4 million, rising 172% from the same period a year ago. Acquisitions have played a big role in Curaleaf's growth, as it said in its earnings release that expansion into new states along with the inclusion of Grassroots into its results was behind its strong Q3 results. Curaleaf completed its acquisition of Grassroots on July 23, 2020, which increased its presence from 18 states to 23. On a pro forma basis, if the Grassroots acquisition closed on July 1, 2020, Curaleaf estimates its revenue for Q3 would have totaled $215.3 million -- 18% higher than its actuals for the quarter.
Overall, both companies have been growing at impressive rates, but Curaleaf holds an advantage today as its sales are already higher than Green Thumb's and its recent acquisitions will make that gap even wider this year. However, focusing on acquisitions can be risky and costly, which is why Green Thumb's strategy may be a bit more suitable for risk-averse investors.
2. Which strategy is more likely to succeed in 2021?
Curaleaf is an attractive option for aggressive growth investors; the company was very busy with acquisitions in 2020. In addition to Grassroots, the company acquired Cura Partners and the Select brand in February. And the company expanded the brand into three more states during Q3, bringing the total number of states where Select is sold to 16.
The company's financing agreements have brought in $185.7 million over the past three quarters to help fund Curaleaf's growth. And as long as the cash keeps coming in, there's little reason to worry about the company's ability to continue to take on acquisitions and grow, especially now that investors are slightly more bullish on pot stocks as new states legalize marijuana.
Green Thumb can benefit from those very same trends. Like Curaleaf, it's also been growing its presence across the country. On Oct. 20, 2020, it announced the opening of a 49th retail location, based in Monroeville, Pennsylvania.
Its focus is more on retail, and if COVID-19 vaccines help get the pandemic under control in 2021, Green Thumb could stand to benefit from an influx of customers during the year from its existing locations while also generating growth from new store openings. Green Thumb's growth has also been less cash-intensive, as the company's free cash flow is a negative $17 million over the trailing 12 months -- significantly lower than Curaleaf's negative free cash flow of $110 million over the same period.
Although both companies will continue growing, Green Thumb's operations look to be more sustainable, making it a bit of a safer investment this year.
3. Which stock is cheaper?
Another key factor to consider is the valuation of these two stocks. Since neither company is recording a profit on a consistent basis, the price-to-sales (P/S) ratio will be the best way to compare these two stocks. This metric shows how expensive the stocks are with respect to their sales:
Green Thumb is slightly cheaper than Curaleaf is today. But once you factor in a full year from its acquisitions, especially Grassroots, Curaleaf's P/S ratio could look very different. There's not a whole lot separating these two stocks in terms of price to dramatically tip the scales in one direction or another, which means...
Curaleaf is the best overall buy today
Although Curaleaf may be a riskier buy when looking at its cash burn, as long as investors are bullish on the stock and continue to buy it, there will be opportunities for the company to raise cash to fund its growth. And its higher P/S ratio may only prove to be temporary once the year is over, as the revenue gap between Curaleaf and Green Thumb could get even wider by the end of 2021.
Green Thumb enjoyed a better year on the markets in 2020 than Curaleaf, but that's a trend I could see reversing this year. As Curaleaf records even stronger numbers from the inclusion of Grassroots and Cura Partners' numbers over a full year, it will be establishing itself as arguably the top pot stock in the world, and many growth investors won't be able to resist jumping on that bandwagon.