September was a rare up month for cannabis stocks. The sector received a boost when the U.S. Department of Health and Human Services, on Aug. 29, recommended that the Drug Enforcement Agency (DEA) should reclassify the drug to a Schedule III substance, putting it in with certain steroids or Tylenol with codeine, instead of where it is grouped now, a Schedule I drug, similar to fentanyl and heroin.
The reclassification would be one step toward allowing federal decriminalization of the drug. As it stands, it is legal in 37 states for medical use and fully legal in 23 states, but not having it legal nationally causes complications that have weighed down cannabis stocks. It's still illegal to transport cannabis across state lines, so the crop must be sold in the same state it is grown in. So, no matter how good a crop a company in Florida may have, it still has to rely on its own greenhouses in other states when selling in those places.
Being banned federally also means that financing is complicated because banks generally won't lend money to cannabis companies. There are also tax problems associated with being illegal at the federal level, as companies cannot make the same type of federal deductions other industries can. The only deduction a marijuana-related business can take is the direct cost of goods sold. For many companies, that difference is enough to make them unprofitable.
Another advantage of federal legalization is that cannabis stocks will likely become more stable and have greater recognition once they are allowed to trade on the New York Stock Exchange or the Nasdaq, which they cannot currently. The U.S. companies that are multi-state operators (MSOs) generally trade over the counter.
The push by HHS shows that federal decriminalization may take a while, but it will eventually come. When it does, the cannabis companies that will benefit are the large MSOs who are financially healthy and have enough economies of scale to take advantage, companies such as Trulieve Cannabis (TCNNF 3.83%), Green Thumb Industries (GTBIF 3.56%), and Curaleaf Holdings (CURLF 5.26%) -- all of whom have seen their shares climb 37% or more over the past three months.
1. Trulieve is biding its time
Trulieve has 188 retail locations across eight states and is the leading cannabis retailer in Florida, Arizona, Pennsylvania, and West Virginia. It has had 22 consecutive quarters of positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). While that's not the same thing as being profitable in terms of net income, the company continues to grow revenue at a solid pace.
The company has grown revenue every year, and while those numbers were down through the first six months this year, the company is poised to benefit greatly if Florida allows adult-use sales as the company has 127 dispensaries in the Sunshine State, with two more scheduled to open soon. An initiated constitutional amendment to approve adult-use sales is on the 2024 Florida ballot, and a Statista report says that the state would be a $2.54 billion market for adult-use sales by 2025 if the ballot passes.
Trulieve, which has 20 dispensaries in Pennsylvania, stands to benefit greatly if that state passes adult-use sales to compete with surrounding states (New York, New Jersey, Delaware, and Maryland) that have approved adult-use sales.
2. Green Thumb is growing steadily
Green Thumb Industries is the only large MSO that is still pulling in positive net income, quarter after quarter. The company just opened its 85th retail location across 15 markets.
The company is doing well enough that, last month, it approved the repurchase of up to 10 million shares. In the second quarter, Green Thumb reported revenue of $252 million, up 2% sequentially, and first-half revenue was $501 million, up 1% year over year. Net income for the quarter was $13 million, down from $24.4 million in the same period a year ago.
The company has shown positive net income in 11 of the past 12 quarters, including the first two quarters this year. Green Thumb also has a strong balance sheet, with only $141 million in net debt.
3. Curaleaf is thinking internationally
Curaleaf operates 150 dispensaries across 18 states and focuses on more populous states, especially New York, New Jersey, Florida, Arizona, Illinois, and Pennsylvania.
It has fewer retail locations than Trulieve in the U.S. but consistently is No. 1 among MSOs in quarterly revenue and market capitalization. Unlike Green Thumb or Trulieve, it grew revenue, year over year, in the second quarter. Over the past four years, it has more than doubled its yearly revenue.
For the second quarter, revenue totaled $338.6 million, up 2% sequentially and 4% year over year. The company has an edge internationally, where it reported revenue of $14 million, up 94% over the same period last year.
While Curaleaf said it is undergoing cost-cutting measures, it continues to lose money. It reported a loss per share of $0.10, compared to $0.07 in the first quarter and $0.03 in the same period a year ago.
If Florida does approve adult-use sales, Curaleaf will likely be Trulieve's biggest competitor in the state, as Curaleaf just opened its 60th dispensary there. The company is also making plans to be listed on the Toronto Stock Exchange, which would give it more visibility.
