We’re overthinking cannabis investments. The United States is the market investors should hang their hat on. Yes, I believe there is a Canadian name and an international name to consider, but the multi-state operators (MSOs) in the U.S. have the biggest market and the biggest opportunity.
Already, numbers here are crushing it in terms of both growth and revenue. What’s more amazing is cannabis isn’t even federally legal and dozens of states still don’t allow sales or only allow medical sales. There is plenty of upside still to be had.
These results can be seen in the recent quarterly and annual report from a top name on the list, Cresco Labs (CRLBF) . The company turned in 2020 revenue of $476.3 million, an increase of 271% year-over-year. The average sales number per store in the fourth quarter was $3.6 million, which produced EBITDA of $50 million for the quarter alone, bringing the total to $116 million on the year. Operating activities threw off cash of over $21 million for the quarter.
These are numbers Canadian licensed producers (LPs) can only dream about. There are several other U.S MSOs I like, including Curaleaf (CURLF) , AYR Wellness AYRWF, and Green Thumb Industries (GTBIF) as these are names seeing strong revenue growth, profitability and have the ability to expand as more states legalize both medical and recreational marijuana.
The fact these companies can’t list on the Nasdaq or NYSE is a disgrace, but I digress; therefore, the simplest approach is to buy the AdvisorShares Pure US Cannabis ETF MSOS.
MSOS will get an investor exposure to every name in the list above plus additional quality names such as Trulieve Cannabis (TCNNF) - Get Trulieve Cannabis Corp (Sub Voting) Report and Grow Generation (GRWG) - Get GrowGeneration Corp. Report. Grow Generation, along with other MSOS holdings Hydrofarm Holdings HYFM, Planet 13 PLNHF and Innovative Industrial (IIPR) - Get Innovative Industrial Properties Inc. Report will also spread the risk into hydroponics, real estate and simply retail.
Not only do I believe MSOS should be on the buy list for anyone interested in cannabis, I believe it should be modeled into every aggressive and moderately aggressive portfolio. I would even give it hard consideration for a small allocation in moderate portfolios.
One Canadian Pick
As for the Canadian company I like, Village Farms (VFF) - Get Village Farms International Inc. Report has been my go-to cannabis name for years with one of the lowest all-in costs in Canada. The biggest hang-up I’ve ever had around the company was its sharing of Pure SunFarms (PSF) as a joint venture with Emerald Health.
Emerald, after the initial signing, brought little to the partnership. The company offered VFF licensed entry for the cannabis space and was a buyer of the product. Unfortunately, as a company, Emerald failed to execute, had to abandon their buy agreement and ran into a huge cash crunch. It became an albatross to the joint venture as it had to focus on survival rather than growth.
Village Farms recently reported earnings per share of $0.12 in the fourth quarter and $0.20 per share for the year. Revenue of $47.4 million came up short of Wall Street expectations despite a strong bottom line. The top line results mirrored the shortfall we’re seeing across the entire industry north of the border.
Village Farms, though, doesn’t have a full quarter under its belt with PSF as a wholly owned entity. With a strong 28% sequential growth in Q4 and 248% year-over-year growth along with nine straight quarters of positive adjusted EBITDA for Pure SunFarms, results should begin trending up in the first quarter of 2021 for Village Farms now that it can fully realize PSF. The company did also lock down a supply agreement with Medical Cannabis by Shoppers Inc., which will give it an additional buyer/outlet.
As we enter deeper into Cannabis 2.0 with the introduction of vape and edibles and products beyond simply those you can smoke, Village Farms is seeing an uptick in its retail sales. Additionally, they were able to sell roughly 10.9 million shares at $12.40 per unit, raising $135 million in the first quarter.
I would expect the stock to at least gravitate back toward that level this quarter. And if Texas ever gets going on the legalization side or even to backing CBD, Village Farms has a ginormous greenhouse in the state just waiting to grow.
One International Pick
Staying with the low-cost idea, I believe there is a lot to like both short- and longer-term with international operator Clever Leaves Holdings CLVR. The company emerged from the merger with Schultze Special Purpose Acquisition with a strong cash position. Yes, it still carries debt, but the cash position is roughly $50 million net and more than two times debt. That ranks it high compared to the Canadian big boys.
Clever Leaves reminds me of the MSOs in the U.S. as it is an MNO (multi-national operator) with facilities in Colombia and Portugal. The massive footprint in Colombia puts it almost on par with the largest players in the entire industry. With that location comes a fractional average cost per gram for production costs of cannabis compared to Canadian LPs.
The key benchmark for Canadian LPs to break is $1.00 to produce a gram of cannabis, which usually only happens in the six warmest months. By comparison, Colombia is looking at a year-round average cost around $0.20, with $0.14 reported as the all-in cost per gram in the most recent quarter. Revenue for 2020 was still relatively small at $12.1 million, but its market cap is under $300 million, so it’s still small in the cannabis world.
The company does have a deal to supply Canopy Growth’s (CGC) - Get Canopy Growth Corporation Report for Latin American subsidiary. That potential expires in this month but could be extended for up to two more years. It is worth watching as it could give the stock a bump.
But Clever isn’t sitting around waiting on Canopy. The company recently announced an agreement with Verdemed Holdings, a Latin American pharmaceutical cannabis company based in Canada. That deal will allow Clever to supply finished CBD products for the Brazilian and Peruvian markets with an initial portfolio of products including finished formulations of CBD oral solutions used for different indications. These products will be sold through pharmacies and drugstores via the compassionate use model.
As more names come to market, investors will have greater choices. Hydroponics and vertical farming should warrant consideration soon. MSOS does provide exposure to these specialties within the sector, but it is small compared to the growers and retail outlets. For right now, don’t overthink it.
Tim Collins is a regular contributor to Real Money, TheStreet’s premium site, and provides options trade ideas each day on Real Money Pro, our sister site for active traders. Click here to learn more and get great columns, commentary and trade ideas from Jim Cramer, Helene Meisler, Mark Sebastian, Paul Price, Doug Kass and others.
At the time of publication, Collins was long MSOS and short VFF puts.