Warren Buffett may be the world's greatest investor, but he's not exactly a trailblazer. It took him forever to invest in technology stocks because he didn't understand it, but when he did he went whole hog. Apple now accounts for a whopping 42.5% of his entire portfolio!
Buffett doesn't own any marijuana stocks yet, but he also said investing in airline stocks was a bad idea, and he eventually did that, too. And the three cannabis companies below just might be far better bets than the airlines that ended up burning Buffett so badly he dumped them at the bottom.
So let's see what Columbia Care (CCHWF -9.05%), Scotts Miracle-Gro (SMG -1.80%), and Trulieve Cannabis (TCNNF -5.95%) have that would convince Buffett a marijuana investment would be a good long-term addition to his portfolio.
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Staying focused on what's important
Rich Duprey (Columbia Care): While Buffett doesn't always follow his own rules, the vintage Buffett often invested in companies that had relatively simple businesses to understand. Think Coca-Cola, See's Candies, Fruit of the Loom, and Duracell. They generally did one thing, and did it well.
While Buffett has also always invested in more complicated issues, I'd like to think the Oracle of Omaha would find marijuana dispensary leader Columbia Care one of those focused businesses that does its one thing well.
The multi-state operator has 99 dispensaries, is licensed in 18 states, runs 31 cultivation and manufacturing facilities, and has wholesale distribution in 13 markets. That makes it one of the largest vertically integrated operators, and seems in keeping with its ambition to get to scale as quickly as possible.
Columbia Care just entered Virginia's new medical marijuana market with some of the state's first whole flower sales for patients under its under Seed & Strain and gLeaf brands. It is anticipating the state to expand such sales to personal and recreational use in the future, a development that is key to the MSO's growth potential.
Columbia Care says its revenue triples or quadruples when local markets expand usage parameters such as going from solely being medical use to also allowing adult usage. Because twice as many states allow for medical marijuana as personal usage, it provides the MSO with an opportunity to see sales rapidly advance as states adopt additional incidences of use.
Last month Columbia Care reported second-quarter financial results showing revenue more than tripled year over year to a record $109.7 million, generating adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $16.4 million, which was a $21 million swing from last year and a 58% increase from the first quarter. It's also forecasting as much as $530 million in revenue for the full year and adjusted EBITDA of between $95 million and $105 million.
Columbia Care has been on a buying spree, but it has kept the acquisitions in its wheelhouse to ensure its main business keeps growing. That seems like the kind of smart management tactic Buffett would approve of.
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Fertilizer is always in style
Alex Carchidi (Scotts Miracle-Gro): Scotts Miracle-Gro doesn't need to grow a single marijuana plant to make billions of dollars in revenue and power shareholder returns. Instead of selling cannabis directly, Scotts makes a galaxy of plant nutrients, hydroponics gear, pesticides, and gardening equipment, all of which it sells to burgeoning marijuana businesses and consumers via its retail outlets. There's a lot that Warren Buffett would like about Scotts, including its strong performance for investors over the last decade, consistent growth, widening margins, and evergreen products.
Quarterly revenue has grown by more than 706% in the last 10 years. But don't take consistency over time to mean a slow pace in the present. Its subsidiary focusing on sales to cannabis cultivators made $421.9 million in the most recent quarter, an increase of 48% year over year, and more growth is likely on the way.
Importantly, costs aren't spiraling while it serves the cannabis industry's gold rush. Over the last five years, Scotts' total operating expenses have shrunk relative to its income, costing only 11.93% of quarterly revenue as of its third-quarter report this year. In the same period, the company's cost of goods sold has also fallen as a percentage of quarterly revenue, and it currently accounts for just over 69%. And, research and development costs are so low that they've seldom added up to more than 3% of quarterly revenue in the last three years.
All of the above speaks to traditional Buffett sensibilities about keeping costs as low as possible with respect to income.
Furthermore, the minimal R&D spending sheds light on the Scotts' business model and the competitive landscape it exists in. Plant food recipes don't need to change to keep selling to old and new customers alike, and there's no product development arms race that the company needs to keep up with as a result.
So, Buffett would also appreciate the relative stability of spending on that front as well, because it means the company can keep doing more or less the same things to keep building its revenue and profits moving forward.
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A stock for a true believer
Eric Volkman (Trulieve Cannabis): Buffett is one of the most successful value investors in history. And if he were ever to "go green" with weed stocks, I think he'd find a lot of value in Trulieve Cannabis.
Trulieve is renowned as being one of the very few consistently profitable MSOs on the scene. It became so by steadily building a presence in its home state of Florida, where it now controls roughly half of the market in the sprawling and very populous state.
The icing on that cake is that Florida has only legalized medical marijuana; in the easily imaginable case that the state succumbs to the recreational legalization wave cresting throughout the U.S., there will certainly be a surge of customers for legitimate product in that segment.
In May, at one stroke, Trulieve made a move to become far more powerful with its buyout of Arizona-based Harvest Health & Recreation (HRVSF). At the time, the Trulieve/Harvest combination had a presence in 11 states, served by 126 dispensaries. According to Trulieve, together the two companies will be the top MSO in terms of its retail and cultivation networks, with leading market shares in both Florida and Arizona.
As is fairly customary in the "sure, why not pay a big premium?" marijuana industry, the deal isn't cheap at roughly $2.1 billion. However, it's being transacted entirely in Trulieve's once-frothy stock, so the company's finances won't take a direct hit at all.
I feel now is a particularly opportune time to buy Trulieve stock. It's not only in front of that Harvest acquisition, it's also just behind a legal controversy that spooked some of its shareholders. Earlier this year J.T. Burnette, the husband of Trulieve CEO Kim Rivers, went on trial in federal court for bribery and extortion, and last month he was convicted of five of the counts he was charged with.
Yes, some questions exist about Burnette's relationship with Trulieve. However, he was not directly involved with the company, so it will likely not face legal ramifications from his conviction.
While investors should definitely keep half an eye on how this develops, I feel the stock's resulting price slump provides more of an opportunity to buy than to worry. Trulieve currently trades at a forward price-to-earnings of barely over 20, quite a low number for an industry still in the throes of wider legalization, and for a growing company that is a clear leader in the marijuana space.
