Do you want to invest in the cannabis industry? One thing you should know off the bat is that marijuana legalization isn't inevitable in the U.S., despite any news you may have heard about drug rescheduling or new bills in Congress. It's important to get that out of the way, as many investors load up on shares of Tilray Brands (TLRY) and Canopy Growth (CGC -0.48%) in the hope that these stocks will benefit from legalization and be surefire ways to invest in the industry's long-term growth.
But in reality, that leaves you exposed to significant risk -- because while you're waiting for a day that may never come (legalization), or at least, not anytime soon, those businesses are struggling to generate any growth that doesn't come from acquisitions. They're also burning through tons of cash.
If you're serious about investing in the cannabis industry and have $1,000 that you can leave in a pot stock for the long haul, then I've got a better option for you: Investing in a cheap multi-state operator that's already generating revenue and profit in the U.S. That company is Cresco Labs (CRLBF -1.83%).
Cresco Labs is all business, without the hype
Cresco Labs is notably different from Tilray and Canopy Growth in its approach. It has a low-key chief executive officer, Charles Bachtell, who doesn't need to hype up his company's performance or growth opportunities. Unlike Tilray's Irwin Simon and Canopy's David Klein, who are often on investing shows talking up their growth prospects, odds are you probably haven't even seen Bachtell or heard of him.
Investors in Cresco Labs may be disappointed with that and with the company not being more aggressive in promoting its stock, but that also means there's less potential for wild swings in its valuation. Sure, Cresco Labs hasn't been a great stock to own in recent years, falling about 80% since 2021, but that's more to do with the industry as a whole than its own individual performance. And it's not as if Tilray or Canopy Growth have performed any better. The former is down about 78%, while the latter has fallen an astounding 97% during the same period.
Cresco Labs isn't the flashiest cannabis company, nor is it the largest -- and that's by design. The company picks its spots carefully and chooses strategic locations. A prime example of that is the dispensary it opened in 2021 in a high-traffic area near Chicago's Wrigley Field. It's strategic moves like that which give me confidence that the company isn't just growing for the sake of growth; it's carefully thinking out its moves and not being overly aggressive compared to other cannabis companies. It recently opened its 72nd location in the U.S., which is nowhere near the 100-plus locations rivals Curaleaf Holdings and Trulieve Cannabis have.
The company generates positive cash flow and turned a profit last quarter
Cresco Labs's commitment to scaling its operations in a sustainable way has paid off. In its most recent results, for the fourth quarter, Cresco Labs reported a profit of $4.9 million. This wasn't an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) profit, which many cannabis companies often focus on. This was a real, unadjusted profit in line with generally accepted accounting principles (GAAP).
The company incurred minimal impairment charges. With a strong gross profit margin of 51% and operating expenses representing just 37% of revenue, there was enough left over, even after interest expenses totaling $14.3 million and nearly $8 million in taxes, for the company to remain in the black. It's an impressive performance that many cannabis investors may have overlooked, simply because Cresco doesn't often get the same attention that Tilray or Canopy Growth does, despite its more sustainable operations.
Last quarter, Cresco Labs used up a fairly modest $3.3 million in cash for its day-to-day operating activities. But over the course of the full year, it generated $58.6 million, which was more than three times the $18.7 million in cash it accumulated a year earlier.
Don't fall for the hype -- buy the cannabis stock with substance behind its operations
The default option for many investors is to choose between Tilray Brands or Canopy Growth when picking a pot stock, and that can be a costly mistake. Those businesses face some serious risks and plenty of uncertainty, as the investing thesis in those stocks often relies heavily on the prospects for legalization in the U.S.
A sounder approach is to put money into Cresco Labs, which is a company that has proven it can turn a profit and isn't burning through piles of cash. For long-term investors, Cresco Labs can make for an ideal place to invest $1,000 in today. At a price-to-sales multiple of less than 1, investors could be getting a steal of a deal.
