Pot stocks have struggled over the past year but that could change in 2020. With marijuana bills in the works that could loosen up some of the laws surrounding the cannabis industry, this year could be a much stronger one for pot stocks. The upcoming federal election may have an even bigger effect, especially if new leadership decides to make an even bigger change: legalizing marijuana.
Any progress toward legalization could make the following three stocks scorching buys this year:
1. Curaleaf
Curaleaf Holdings (CURLF +0.76%) is one stock that would benefit significantly from a change in government policy on marijuana. The company has been busy acquiring cannabis companies and licenses over the past several years. Its largest acquisition is the still-pending Cura Partners.
Whether it's banking reform that grants cannabis companies easier access to financial institutions, or federal legislation that would permit marijuana outright, either change would have a positive impact on the company's financials over the long term. Although Curaleaf has done an exceptional job of growing its business, with sales over the past 12 months totaling $178 million, the problem is that its net losses over that period have come in at $57 million, or 32% of revenue.
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A key part of that is selling, general, and administrative (SG&A) expenses of $118 million, which are more than enough to wipe out the company's gross margins of $98 million. Marijuana reform will help the company bring down the unnecessary admin costs that result from all the red tape in the industry. Just the ability to transport pot across borders will improve operational efficiencies, helping the company get much closer to breaking even. In turn, that will make the company much more investable and get investors excited about the stock.
Although those are long-term benefits that won't be realized right away, they will result in a better outlook for the company's future which is sure to get investors more bullish on Curaleaf.
2. Acreage
Acreage Holdings (ACRGF +0.00%) is another multistate operator that could stand to benefit, potentially even more than Curaleaf.
Not only could cannabis reform help bring down its expenses, but it could also open the door for its deal with Canopy Growth to finally go through. Although the two companies initially reached an agreement where Canopy Growth would acquire Acreage, it remains in limbo until the deal is legally permissible to go through. And the easiest way for that to happen will be if the U.S. government legalizes pot at the federal level. That's a long shot today and won't likely happen this year, but the election of a presidential candidate who promises to legalize pot could be enough to make investors bullish on Acreage. The deal with Canopy Growth is a long-term bet on the industry and any move to suggest that legalization could happen sooner rather than later will definitely send Acreage's stock soaring in a hurry.
For Acreage, the situation is even more critical, as over the trailing 12 months its net losses have been a whopping $301 million on just $64 million in sales.
3. Green Thumb
Green Thumb Industries (GTBIF +1.30%) doesn't have a big deal waiting in the wings like Acreage does, but similar to Curaleaf, shedding some costs could make breakeven a real possibility for the company. Its losses over the trailing 12 months have been a bit more modest at $52 million as its SG&A costs are also making up a substantial (84%) piece of its operating expenses, which at $119 million are 74% of revenue and well above gross margin.
The Chicago-based pot producer also has an additional incentive in its home state where CEO Ben Kovler estimates the market there could be worth between $2 billion to $3 billion in revenue. Federally legalizing pot would make it easier for the company to tap into that potential by transporting supply as Kovler notes that people have less variety of products in Illinois than in other states that have already legalized pot and where Green Thumb has a more developed supply chain. Legalization would eliminate that problem as the company would be able to ship products across the country, improving its supply chain in Illinois and generating more revenue in the process.
What does this mean for investors?
As marijuana stocks keep treading water, investors should remain on the sidelines -- the lower these stocks go, the more potential there will be for a rally. If federal marijuana legislation passes this year, or if a new, pot-friendly president is elected, these stocks will take off in no time.
The stocks listed above may have struggled over the past year but investors shouldn't count them out just yet. They are dominant forces in the industry today and will get even stronger once marijuana is legalized.
