The legalization of marijuana in the U.S. could set off one of the biggest growth trends in history. Even though pot has only been legalized in about half the states for either medical or recreational use (or both), New Frontier Data estimates the U.S. legal weed market will grow 16% on an annualized average basis through 2025. That means annual marijuana sales will hit $43 billion, or more than double its current size.
Not every cannabis business will be a winner, but the three-pot stocks below look best-positioned right now to capitalize on the opportunity.
Fast-growing small cap Columbia Care (CCHWF -9.56%) is an example of a marijuana stock that's been unfairly beaten down because it's choosing to invest in growing to scale quickly. The multistate operator (MSO) has 99 dispensaries in 17 states, with 31 cultivation and manufacturing facilities operating alongside its wholesale distribution business in 13 markets. Columbia has also added:
- Vertically integrated medical marijuana company Green Leaf Medical
- CannAscend, a four-dispensary operation focused on Ohio
- Project Cannabis, a California-based cultivator, wholesaler, and retailer
It also just entered Virginia's new medical marijuana market with some of the state's first whole-flower sales for patients.
The MSO anticipates the state will expand sales to personal and recreational use in the future, a move Columbia contends will triple or quadruple its revenue when it happens. Since twice as many states allow medical use as recreational consumption, the MSO is perfectly positioned to capitalize when the switch occurs.
Shares of Columbia Care are down 33% year to date, but analysts at Cantor Fitzgerald are forecasting its stock could rise by over 37% in the coming year and have set a price target of $5.50 per share. Since Columbia Care is profitable on an adjusted basis, it's a pot stock to buy before the market corrects its myopia.
Another vertically integrated MSO with a presence in 10 states, Cresco Labs (CRLBF -11.37%) is the leading wholesaler of branded marijuana products that are sold in 700 dispensaries nationwide. Moreover, it owns 37 dispensaries of its own, along with 20 production facilities. That makes it one of the largest MSOs around, with its broad footprint fueled by both acquisitions and organic growth.
Second-quarter revenue jumped 123% this past quarter to $210 million generating GAAP earnings of $2.7 million and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $45.5 million. Cresco expects to generate $1 billion this year, with gross profit margins exceeding 50% in the third and fourth quarters.
The key to Cresco's success has been focusing on markets where licenses to operate have been limited, so its competition has been minimized by the state or local government. It has the opportunity to develop its brands into the ones users seek out, giving it the chance to develop a loyal customer base.
In keeping with that narrowness of purpose, Cresco has one of the few cannabis distribution licenses in California, the world's largest market for marijuana based on annual sales.
Its stock is also depressed, down 45% from the highs hit in February after the market sold off most pot stocks. This is another cannabis player with enormous potential.
The third stock to consider is yet another MSO, Trulieve Cannabis (TCNNF -9.88%). There's a reason for focusing on this particular space in the marijuana market, because companies here are the ones that stand to profit the most from pot's coming rise. Trulieve investors will win because the market has thrown the proverbial baby out with the bathwater on this one.
Beyond the broad move away from cannabis companies and the potential for regulatory snafus that may arise if and when legalization is achieved, Trulieve's stock was hit because of guilt by association. Its CEO's husband was found guilty of fraud in an unrelated business, and the market reacted.
This market reaction gives investors a chance to buy a top-notch pot stock at a discounted valuation. Its stock is also down 45% from its peak, but Trulieve is a profitable MSO and has been operating in the black for over three years.
Trulieve has achieved this distinction by also focusing on its target market, which up until recently has been primarily the state of Florida, though it's now trying to replicate its success in other states. It achieved economies of scale that it can now apply to new markets and grow at a methodical pace.
There's no question Trulieve will need to prove itself more than most pot stocks because of the legal woes of its CEO's husband, but if you're willing to assume the taint stops at Trulieve's front door, this could be a winning investment in the years to come.