You might not realize it, considering how poorly the stocks in the cannabis industry have performed over the past 18 months, but legal marijuana remains one of the world's fastest growing trends.
In March, cannabis-focused research firm BDSA released a report ("Essential Cannabis Insights") that projected global sales would grow from an estimated $35 billion in 2022 to $61 billion by 2026. For those of you keeping score at home, that's a compound annual growth rate of more than 16%; and it comes on the heels of 22% annual sales growth over 2021.
Although federal legalization efforts have been stymied in the highly lucrative U.S. market, ample opportunity exists for multi-state operators (MSOs) to thrive. At the moment, there are two marijuana stocks that patient investors can confidently buy hand over fist, as well as one superficially inexpensive pot stock that should be avoided at all cost.
Marijuana stock No. 1 to buy hand over fist: Cresco Labs
The first pot stock that can help long-term investors see the green is none other than U.S. MSO Cresco Labs (CRLBF -1.08%).
To address the elephant in the room, Congress has failed on multiple occasions to pass cannabis banking reform and/or legalization reform. While this does lead to ongoing operating redundancies for cannabis stocks -- e.g., setting up cultivation and processing facilities in multiple states since the interstate transport of weed is illegal -- the legalization of pot at the state level in roughly three-quarters of all states is providing abundant growth opportunities for MSOs like Cresco.
As of the end of March, Cresco was a modestly sized MSO, with 50 operating retail locations and a presence in 10 states. Although Cresco has a footprint in a number of high-dollar markets, it's really focused its attention on limited-license markets, such as Illinois and Pennsylvania. States where retail license issuance is being purposely limited ensures that smaller players like Cresco have a fair shot to build up their brands and gain a loyal following.
But Cresco Labs is unlikely to be a modestly sized player for much longer. In late March, Cresco announced its intent to buy MSO Columbia Care (CCHWF -2.64%) in an all-share deal. All signs point to this deal closing sometime in the fourth quarter. Should this deal close, Cresco's operating retail locations would swell to north of 130, with its footprint growing to 18 states. Columbia Care has primarily grown by acquisition, and the Cresco acquisition of Columbia Care would be a quick way to more than double its reach in the world's most-lucrative weed market.
In addition to growing its retail presence by leaps and bounds, Cresco Labs has the industry's leading wholesale cannabis segment. Though Wall Street largely downplays wholesale marijuana due to its lower margins, relative to the retail side of the equation, Cresco has the volume to more than offset weaker margins. That's because it holds a highly coveted cannabis distribution license in California, the nation's top weed market by annual sales. This license allows Cresco to place its proprietary pot products into more than 575 stores throughout the Golden State.
Cresco is about to get a lot larger and should have no trouble pushing into recurring profitability by 2023. That makes it one of the most-intriguing pot stocks in North America.
Marijuana stock No. 2 to buy hand over fist: Planet 13 Holdings
Without a doubt, you could say Planet 13 has taken the road less traveled. Whereas most MSOs have opted to establish a retail, cultivation, and/or processing presence in as many high-dollar, legalized pot markets as possible, Planet 13 has a presence in just four states, with a mere three operating dispensaries. But it's this unique operating approach that gives Planet 13 a sustainable edge.
To date, the company has opened two SuperStores. The Las Vegas SuperStore, just west of the Strip in Nevada, spans 112,000 square feet and features an events center, consumer-facing processing center, and café. Meanwhile, the Orange County SuperStore in Santa Ana, Calif., sits about 15 minutes from Disneyland and covers 55,000 square feet. Approximately 30% of this space is devoted to selling.
Planet 13's SuperStores are enormous and feature unrivaled selection for both dried cannabis flower and higher-margin derivative products. These stores have also incorporated the ideal combination of technology and personalization. Consumers can use self-pay kiosks to speed up the purchasing process, and also have access to personalized budtenders who can show them around.
Despite only having a handful of operating retail stores, Planet 13's reach is rapidly growing. Its proprietary brands can be found in more than 100 retail locations. What's more, the company plans to bring its SuperStore concept to Chicago, Ill., while opening its neighborhood retail concept in Florida. These neighborhood stores will offer a boutique-styled setup and span roughly 4,750 square feet. Medical marijuana-legal Florida has only assigned 22 retail operator licenses, but license-holders like Planet 13 can open as many stores as they'd like. That's great news for one of the top-dollar cannabis markets in the United States.
Similar to Cresco Labs, Planet 13 is likely on the cusp of recurring profitability and should be there by no later than 2023. With an operating model that simply hasn't been duplicated, Planet 13 looks like a no-brainer buy for long-term investors.
The cannabis stock to avoid like the plague: Aurora Cannabis
But there's another side to this story. If there's one consistency about next-big-thing growth trends, it's that not every company is going to be a winner. Although the global cannabis industry offers blazing growth through 2026, Canadian licensed marijuana producer Aurora Cannabis (ACB 0.77%) is a pot stock investors should avoid like the plague.
Three years ago, there may not have been a more widely held or popular marijuana stock on the planet than Aurora Cannabis. This acquisition-happy company had amassed a portfolio of 15 production sites and could have, in theory, produced north of 600,000 kilos a year of cannabis if its cultivation sites were fully operational. The expectation had been that Aurora would control a significant chunk of the legalized Canadian market, as well as become an exporting powerhouse.
Unfortunately, none of this came to fruition for Aurora, and the company has been trying to dig its way out of a very deep hole for years. Even after shuttering some of its smaller production facilities, halting construction on a number of major projects, and reducing expenses (including stock-based compensation), it hasn't come close to profitability and has continued to burn cash.
To be fair, some of this blame lies with Canadian regulators, which set pot stocks up to fail. The Canadian federal government was slow to approve cultivation licenses, while Ontario, the nation's largest province, failed to approve retail licenses in a timely manner.
But most of the blame lies with Aurora. The company vastly overestimated production demand and grossly overpaid for around a dozen acquisitions. Aurora Cannabis ultimately wrote down billions of dollars in goodwill tied to these buyouts.
The company's persistent share-based dilution is equally damaging to its shareholders. Because no amount of cost-cutting has been able to move Aurora into the black, the company has had to issue stock on more occasions than I count to raise capital. Since the midpoint of 2014, Aurora's split-adjusted share count has ballooned from a little over 1.3 million shares to more than 224 million shares, as of March 31, 2022. Its share count will likely continue growing with net losses expected for the foreseeable future.
Aurora Cannabis might look like a superficial bargain at just $1.41 a share, as of last weekend, but it continues to be one of the worst possible investments in the cannabis space.