Picking cannabis stocks is tricky right now, with the industry gripped by a downward trend in the market. It's not a new phenomenon either; over the past three years, the ETFMG Alternative Harvest ETF and the AdvisorShares Pure Cannabis ETF have dropped 70% and 76%, respectively.
A recent market research report by Facts and Factors expects global legal medical and recreational marijuana revenue to cross $97 million by 2026, from $22 billion in 2020, growing at a compound annual growth rate (CAGR) of 28% between 2021 and 2026. Few argue about the future growth in the industry. But until federal legalization occurs, there's going to be quite a bit of a shakeout, with some companies rising to the top and others failing or being swallowed up by larger competitors.
That makes it more important than ever to invest in cannabis companies that have been on a path toward maintaining solid sales growth, such as Verano Holdings (VRNO.F 7.66%) and Green Thumb Industries (GTBIF 2.46%). They are among the few multi-state operators (MSOs) who showed sequential and year-over-year growth in revenue in their most recent quarters.
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1. Gulp and dive in on Verano
Verano Holdings' shares have been a dumpster fire, down more than 65% this year. The company only went public last year, so there are a lot of unknowns about it, but it is already one of the largest MSOs with 135 operating retail stores and more than 130 planned. Its biggest footprint is in Florida, with 59 dispensaries, along with 15 in Pennsylvania and 10 in Illinois.
The company reported second-quarter revenue of $224 million, up 12% year over year and 11% sequentially, with a gross profit of 44% of revenue, compared to 35% of revenue in the same period last year. The company also narrowed its net loss to $10 million, down from a $30 million net loss in the first quarter of 2021.
Verano is soon expected to close on its $413-million purchase of Goodness Growth Holdings, which will give it, among other things, an entry into the lucrative market in New York ahead of that state's adult-use rollout, as well as retail locations in Minnesota and New Mexico. The move into New York includes four dispensaries in the state under the Vireo Health name and a medical cannabis home-delivery service across New York City and all its boroughs and in Westchester, Rockland, Nassau, and Suffolk Counties.
According to management, Verano's recipe for eventually becoming consistently profitable is based on increasing efficiency with more automation, plus spending on research and development to ensure better genetics for more profitable cultivation. It's also focusing on states such as New York in the short term, and Florida and Pennsylvania in the long term, as these should be very profitable adult-use states.
2. Green Thumb is consistently profitable
Green Thumb Industries has seen its shares fall 58% this year. However, it has had eight consecutive quarters of positive net income, one of only a handful of multi-state operators that are consistently profitable. As of Sept. 1, the company had 77 retail locations across 15 states, including four dispensaries in New York.
While the company's revenue has risen 468% over the past three years, and its net income has turned positive and has been growing steadily over the last eight quarters, its share price has risen only 6% in the same three-year period after a roller coaster ride with shares seeing a 300% gain in February 2021.
Clearly, that speaks more to the general consensus regarding the weakness in the cannabis industry than Green Thumb's own financials. That makes it an even better long-term investment, as it is attractively priced, with a price-to-earnings (P/E) ratio of 21.
In the second quarter, the company reported $254.3 million in revenue, up 14.6% year over year and an increase of 4.8% sequentially. It also reported a net income of $22.1 million, or $0.10 in EPS, though those numbers represented a decline from the $28.9 million net income and $0.12 in EPS reported in the second quarter of 2021. The company said its revenue numbers benefited from New Jersey's opening up to adult-use sales, as well as increased sales in Illinois and improved traffic in its retail locations. Through six months, it reported revenue of $496.9 million, up 19.4% over the same period last year.
Green Thumb has been more cautious than some other MSOs in expansion, and this may help it in the future. In the last quarter, it was behind only Curaleaf Holdings and Trulieve Cannabis in reported revenue and led U.S. cannabis companies with $63.6 million in adjusted operating income.
Two choices, different philosophies
Verano is all about growth and then hoping that growth will outstrip expenses. It appears to be on that track, but as volatile as cannabis has been in the last few years, it certainly represents more risk. Green Thumb, to me, is a safer bet in the long term as it is growing while remaining profitable. It also has a lower debt-to-equity ratio at 0.134 to 0.232 than Verano.
However, with the current market doldrums, it makes sense to play a wait-and-see attitude about how some potentially more profitable adult-use states, particularly New York, play out when it completes its rollout.
