The stock market and risk go hand in hand, and volatility is nothing new in investing. But in an evolving sector like marijuana, you can expect a little more of it. This has been evident from the recent surge in cannabis companies' stock prices.
Investors had almost lost faith in the sector in 2019 after its drastic downfall, but 2020 lit a ray of hope. Now, 2021 seems to have lifted the sector sky-high. Most of the reason is general optimism surrounding the industry's potential, with the upcoming mega-merger deal between big Canadian players Aphria and Tilray as the highlight.
But U.S. cannabis stocks are still my favorite. Why? They have outperformed even in a limited legal market. Even though a few new states were added to the legal cannabis list after the November elections, marijuana remains federally illegal in the U.S.
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Massachusetts-based Curaleaf Holdings (CURLF -0.51%) is my top pick among the U.S. cannabis companies. It has showed outstanding results in all three quarters of fiscal 2020 so far, from triple-digit revenue growth to consistent positive EBITDA (earnings before income, tax, depreciation, and amortization). Curaleaf's stock is up 23.2%, about half of the 50% the industry benchmark, the Horizons Marijuana Life Sciences ETF, has gained so far this year.
Here are the reasons why investors should consider buying and holding this pot stock.
1. Outstanding and consistent revenue growth
Overall, the cannabis sector saw strong revenue numbers as pandemic-driven anxiety led to higher marijuana sales. But Curaleaf, in particular, impressed investors with its revenue growth. In its third quarter of fiscal 2020, which ended Sept. 30, revenue soared threefold -- up a stunning 195% year over year to $182.4 million. Both its segments, retail and wholesale, contributed by garnering higher sales during the quarter. Retail sales jumped 206.5% to $135.3 million in Q3, from $44.2 million in the year-ago period. Meanwhile, wholesale revenue soared from $6.5 million in Q3 2019 to $45 million in Q3 2020.
2. A focus on expansion is bringing profitability closer
Curaleaf is a vertically integrated cannabis company, which allowed it to control its supply chain and avoid any production disruption amid the pandemic -- hence the higher sales and positive EBITDA. It saw positive adjusted EBITDA of $42 million in Q3 2020, up from $10.4 million in Q3 2019. It also registered positive EBITDA in the first two quarters of fiscal 2020, and that metric jumped by 51% in the second quarter, displaying the rate at which the company grew its sales amid the pandemic.
Also driving sales and EBITDA is the company's ability to expand amid a crisis. At the start of 2020, with its fourth-quarter 2019 financial results, the company reported only 54 dispensaries across 17 U.S. states. At the end of Q3 fiscal 2020, it had a total of 96 dispensaries across 23 states. If EBITDA grows at this rate, there are chances Curaleaf could start making profits by this year.
What I applaud about Curaleaf is the fact that, despite focusing on expansions, it kept its balance sheet strong. It ended the third quarter with $84.6 million of cash on hand and $280 million of outstanding debt, net of unamortized debt discounts.
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3. Management hopes to end 2020 on a high note
Curaleaf's management is highly optimistic about the end to fiscal 2020. In the Q3 earnings call, CFO Michael Carlotti stated the company anticipates managed revenue of about $240 million and pro forma revenue of $250 million in the fourth quarter. Given the company's history of consistently improving revenue growth, I am confident it will be able to hit this target.
Furthermore, ex-CEO Joseph Lusardi (who passed the torch Jan. 1 but remains executive vice chairman of the board) also mentioned BDS Analytics estimates that Curaleaf could generate close to $30 billion in revenue by 2025. And that estimate is centered around its operations in just 23 states -- it doesn't include the effects of growth from the new states added to the legal list, or from more states that might legalize marijuana in the near future. Currently, a total of 35 states and the District of Columbia allow cannabis use for medical purposes, while 15 states and D.C. have legalized recreational cannabis use. Over the last few weeks, legislatures in Virginia and New Jersey also voted to legalize the recreational use of cannabis. Curaleaf already has a stronghold in the medical cannabis market in New Jersey, according to the management, and the company has begun doubling its production capacity to capture the recreational market as well.
I believe its acquisition of hemp cannabidiol (CBD) company Grassroots could be the driving factor for the higher revenue in Q4. The acquisition, which closed in July, makes Curaleaf the proud owner of 135 operating dispensaries with a stunning 1.6 million square feet of cultivation capacity. This will help the company meet the growing national demand. Acquisitions have always been fruitful for the company -- its Curaleaf NJ and Arrow acquisitions in 2020 also led to higher retail revenue sales, as reflected in Q3 results.
No second thoughts about this pot stock!
Curaleaf's new CEO, Joseph Bayern, was the company's president until the end of last year. The new CEO believes the U.S. cannabis industry could "grow to $75 billion or $100 billion in size over the next decade" -- and says Curaleaf is "uniquely positioned" with its differentiated and innovative products and its U.S. footprints to take advantage of this market. Every CEO has a different style of running a company, and it will be interesting to see how the company will progress under new leadership. We will know more about its fiscal 2021 plans when the company reports its Q4 2020 results on March 9.
A stable balance sheet, strong leadership team, exciting growth opportunities, triple-digit revenue growth, an expanding national footprint, and consistent positive EBITDA are all the reasons this cannabis stock is a buy and hold for the long haul.
