Because the potential of the marijuana industry is so enormous, it's easy to get blinded by the largest players in the space thinking they will command the field and generate the best returns.
Enterprising investors might want to take a different tack, looking beyond the big names for the best growth opportunities. Precisely because the cannabis industry is so wide open at the moment, today's big deals could be tomorrow's has-beens, and MariMed (MRMD -5.66%), Village Farms International (VFF -5.69%), and GrowGeneration (GRWG -4.79%) could be the real cannabis winners.
A small operator punching above its weight
Eric Volkman (MariMed): Anyone even casually familiar with marijuana stocks has probably at least heard of the top multi-state operators like Green Thumb Industries, Curaleaf, or Cresco Labs. But there's one some haven't been acquainted with, and it's a company more than worthy of investor consideration -- MariMed.
In contrast to some of its peers, MariMed isn't actively building out into a big set of markets. It's currently active in only five states (its home of Massachusetts, Illinois, Delaware, Maryland, and Nevada). Merely seven of its dispensaries are operational, but there are a few caveats here.
First, four of those seven are in Illinois, a populous state that has seen powerful growth in marijuana sales since legalizing recreational cannabis at the start of 2020.
Additionally, the company has three dispensaries under construction. Two are in another lively weed market, Massachusetts, and the other is in Maryland. Medical marijuana sale and use is permitted in the mid-Atlantic state, and the political trajectory seems to be heading toward recreational legalization perhaps as soon as 2022.
Meanwhile, covering another critical end of the marijuana product chain, the company operates four cultivation facilities; one apiece in Massachusetts, Delaware, Maryland, and Nevada.
MariMed's modest presence and stealthy-growth approach limits its exposure and saves expenses. At the same time, by being present in states that are growing robustly, the company can catch the sharp upward momentum those markets have experienced.
Like numerous peers, MariMed also has a product portfolio, but true to its nature this is fairly small with only four "house brands." Still, the company has made encouraging inroads with these goods, particularly its colorful Betty's Eddies line of comestibles. These attractively packaged vegan, dairy- and gluten-free edibles have a good shot at finding a market niche. After all, many pot consumers favor products with such attributes.
For MariMed, being relatively cautious yet active in high-growth locations has resulted in that rarest of all things for marijuana companies -- a string of bottom-line profits. In its four most recently reported quarters MariMed has landed in the black, topping out at almost $7.6 million in the latest one, the second quarter. In each of those frames, revenue saw double-digit quarter-over-quarter rises; the Q2 tally was nearly $32.6 million, 32% higher than the first-quarter result.
MariMed might not be famous compared to its rivals, but that's to our advantage as investors -- it's cheap on both a raw share price basis and on its valuations. This is one small joint that could very well produce a mighty high.
This tomato seller is making green in more ways than one
Alex Carchidi (Village Farms International): If you've ever struggled to grow a tomato plant in the backyard, you can probably appreciate that professional tomato growers with mega-scale greenhouses are a bit more efficient at the process than you are.
That's where Village Farms International comes in, supplying your local supermarket with inexpensive yet juicy tomatoes from its hundreds of acres of indoor produce cultivation space. Lest you get the idea that this company is all about tomatoes, it's also one of the most successful marijuana growers in Canada, and that's what makes it an offbeat stock worth a closer look.
Via its subsidiary Pure Sunfarms, Village Farms is selling an ever-increasing volume of cannabis using its decades of indoor cultivation expertise.
For the last four quarters in a row, Pure Sunfarms has grown its revenue from branded products by more than 20% sequentially in the face of hot demand in Canada. In Village Farms' Q2 earnings report, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) from Pure Sunfarms exploded by 192% sequentially. And, Village Farms' total revenue expanded by 48% year over year, largely powered by cannabis sales.
Management is working hard to keep expanding the cannabis business even further. On Aug. 16, the company purchased a small American cannabidiol, or CBD, business called Balanced Health Botanicals for $75 million in cash and stock. The acquisition should lead to around $30 million in new annual sales for Village Farms. More importantly, it now has the supply and distribution infrastructure it needs to start to penetrate a segment of the U.S. market for cannabis.
That means investors should expect next year to yield even more revenue than 2021. With growth like that, Village Farms could soon return to turning a quarterly profit. In sum, it's an exciting time to be a shareholder -- and it might even be a favorable time to buy the stock.
It doesn't matter who wins to this company
Rich Duprey (GrowGeneration): Because the cannabis industry's potential is so great it's possible the tide will rise enough that all boats will be lifted. In other words, regardless of the pot stock you buy, you might make out OK.
More than likely, there will be winners and losers just as in every industry, but picking those companies that will come out on top will be complicated. Why not pick a stock that will succeed no matter who wins? That's why I think GrowGeneration could be the best choice. It's selling the picks and shovels to today's "green rush" miners.
GrowGeneration sells hydroponics equipment and gardening supplies to the industry and it continues to expand its network of commercial growing supplies. It just acquired Commercial Grow Supply, which gives it a greater presence in Southern California. Of the 60 retail locations GrowGeneration operates, 22 are located in California and almost half of those are in the southern half of the state.
The rest of its locations are spread out over 10 other states including Colorado, Michigan, and Maine. While the growth by acquisition strategy could be a problem if things get unwieldy, GrowGeneration is proving it has a firm grip on its business as revenue nearly tripled last quarter while comparable sales soared 60% year over year.
That indicates the hydroponics and gardening supplies retailer is getting a lot of repeat business, and more importantly, it's profitable business. Net income hit $12.8 million in the second quarter, up from just $480,000 a year ago.
So why has GrowGeneration lost more than half its value since February? In a word, guidance. Management says states like New York and New Jersey, potentially large cannabis markets now that it's been legalized, have dragged their feet on licensing. Inflation has also sapped GrowGeneration's ability to build new locations. It had four locations that it expected to be operational by the second quarter, early third quarter at the latest, but runaway pricing and supply chain issues have held it back.
Yet these are only short-term issues. While profligate government spending is fueling rising prices, the shortages caused by supply chain disruptions are exacerbating the situation. Once port congestion and other snags are sorted out, goods will flow once more and the shortages will resolve themselves.
GrowGeneration's multiples seem exorbitant because it's suddenly flush with profits, but analysts do expect it to grow earnings at a compounded 20% rate annually for the next few years. That makes the discounted price the picks-and-shovels retailer trades at a good buy now.