Marijuana investors have been discouraged the past two years due to the lack of progress toward federal legalization in the U.S. Meanwhile, the Canadian cannabis market, despite being fully legal, appears to be saturated, causing problems for the companies there.
Still, there are a few cannabis companies with solid fundamentals that have the potential to thrive as the industry matures. Cannabis is rapidly expanding, and it takes time for growth companies to show their full potential. According to Allied Market Research, the global marijuana market is expected to generate $149 billion in annual sales by 2031, with a compound annual growth rate of 20%.
If you're a patient investor who believes the cannabis industry will bounce back, investing in these two growth stocks now could pay off in the long run.
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1. Trulieve Cannabis
For a long time, domestic marijuana player Trulieve Cannabis (TCNNF 3.83%) concentrated solely on its home state of Florida. While industry experts thought that was a mistake, Trulieve's strategy worked in its favor. With 125 stores, it has established a dominant position in its home state. This prevented the company from haphazardly expanding and burdening its balance sheet.
It has now expanded to other states, with a total of 186 stores across the country offering a wide range of cannabis products for both medical and recreational use.
Oversupply and pricing pressure in the U.S. has hurt revenue growth for most cannabis companies in the past couple of quarters. The company's total revenue fell 10% year over year to $282 million in the second quarter. Trulieve has consistently generated quarterly positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in the last few years, before the saturated U.S. markets took a toll on most cannabis companies.
Meanwhile, Trulieve's Canadian rivals are still struggling to achieve EBITDA profitability. However, EBITDA does not accurately reflect true profit and the company reported a net loss of $404 million in Q2.
Trulieve's dominance in Florida will be an advantage if the state legalizes recreational cannabis. Trulieve's monopoly in a limited-license market has allowed it to build a loyal customer base for its products, which could help it see green in its bottom line soon.
Trulieve had $160 million in cash, cash equivalents, and restricted cash at the end of the quarter. The company has the financial resources to expand, even into international markets. Its debt-to-equity ratio, on the other hand, is 0.89. A higher ratio indicates that the company is heavily reliant on debt to operate or expand. Trulieve should be wary of overburdening its balance sheet if it doesn't intend to repeat the mistakes made by its peer Aurora Cannabis, whose shares have declined 99% in the past five years
2. Green Thumb Industries
Unlike Trulieve, Green Thumb Industries (GTBIF 3.56%) has made a steady climb. It grew from 39 stores in eight states in 2019 to 84 stores in 15 states as of August 2023.
Green Thumb has managed to increase its revenue from $216 million in 2019 to $1 billion in 2022 in an intensely competitive sector, giving Trulieve stiff competition.
However, headwinds had an impact this quarter. In the most recent second quarter, revenue fell 1% year over year to $252 million. The company targets markets with limited licenses, where only a few cannabis companies are allowed to operate.
This strategy has enabled it to draw in loyal customers to keep delivering consistent profits. Green Thumb has reported positive net income for 11 consecutive quarters under generally accepted accounting principles (GAAP) -- a rare occurrence for cannabis companies. In the second quarter, it reported net income of $13.4 million.
Despite difficult industry conditions, management is pleased with its progress this quarter. Green Thumb President Anthony Georgiadis stated in the Q1 press release, "While the cannabis industry continues to face challenges, at Green Thumb, we have been able to navigate a path to profitability and strong operating cash flow."
Green Thumb's steady expansion over the years may have kept its debt-to-equity ratio low at 0.16. The company had $290 million in debt outstanding and $149 million in cash and cash equivalents at the end of the first quarter. If it keeps bringing in consistent profits, it should be relatively easy to repay the debt while also financing growth. In the second quarter, the company opened six new locations.
The potential upside for these growth stocks could be enormous
To enjoy the rewards of a growth stock, investors must be patient. Both stocks have fallen significantly this year, owing to doubts that federal legalization in coming in the near future. Despite their stock performance, both companies are doing well.
This is most likely why Wall Street analysts rate both stocks as strong buys. Trulieve's stock could rise 175% in next 12 months, according to the average estimate of analysts, while Green Thumb's stock is expected to rise 132% in the next year.
Both cannabis stocks are currently undervalued, with a price-to-sales ratio of less than 2. For investors with a high risk tolerance and a willingness to hold the shares until the companies realize their full potential, these two could be worth the risk. However, starting with a small investment in both stocks alongside a diversified portfolio of stable stocks would be a smart move.
