Earlier this year, Senate Majority Leader Chuck Schumer, the New York Democrat, introduced draft legislation that could legalize marijuana at the federal level. Although that might be a best-case scenario for the industry, any kind of reform could be welcome news for multi-state operators (MSOs). Simply passing legislation that would make it easy for cannabis companies to access banking services would help them tap into more money for growth.
Two companies that have the most to gain if there is major reform are Green Thumb Industries(OTC:GTBIF) andCuraleaf Holdings(OTC:CURLF). These are two of the top MSOs in the country, and here’s why their shareholders could be big winners if the federal government eases the rules for the marijuana industry.
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Green Thumb Industries
Green Thumb Industries has been aggressively growing its operations across the U.S. On Aug. 9, it opened its 62nd retail location; two years ago, it was at just 28. The company has been looking to expand just about anywhere — its most recent move was to enter the Rhode Island medical marijuana market this month, acquiring a vertical license that allows it to open a retail location there and set up production. The move expands Green Thumb’s presence into 14 states.
Green Thumb is already growing its business very aggressively, and marijuana reform would allow it to move at an even faster pace. Vertical licenses are currently crucial, because the federal ban on marijuana prohibits cannabis businesses from moving their products across state lines. Legalization would help Green Thumb take advantage of economies of scale and bring its costs down. And that would go a long way in boosting its bottom line.
Although the business has posted a profit in each of the past quarters, its net margin fluctuates at 10% or less. That doesn’t leave a whole lot of room to absorb a big increase in costs should it undergo aggressive expansion in a new marijuana market. Even if the only immediate change to the industry is banking reform, that could help Green Thumb take on additional debt to potentially make more acquisitions to grow its operations.
Green Thumb isn’t doing badly by any means — as mentioned, the company is profitable, and for six straight quarters, it has generated positive cash flow from its day-to-day operations. But getting some help from the federal government could set it up for some even better results.
This cannabis company is one of the best investments you can make in the U.S. pot market today. And it’ll be an even better one once the barriers in the industry are gone.
Curaleaf is another company that has been expanding rapidly in recent years. And with operations in 23 states, including 108 dispensaries, it has an even broader footprint than Green Thumb.
Curaleaf is looking beyond just the U.S. market. In April, the company announced the closing of its acquisition of Emmac Life Sciences, a European cannabis company that Curaleaf sees as pivotal to its expansion in Europe; at the same time, it established Curaleaf International — a new business that is focused on growth opportunities in the European market and which encompasses Emmac.
But that aggressive expansion has made it difficult for the company to post a profit. In its latest results, for the period ending June 30, Curaleaf increased its revenue by 166% year over year to $312 million. But its net loss of $7 million more than tripled in size from the $2 million loss it incurred a year earlier. During the period, the company opened multiple dispensaries, including in Pennsylvania, Illinois, and New Jersey, as well as the first adult-use store in all of Maine.
Curaleaf is expanding quickly across the U.S., and it is another example of a business that could be in much better shape with some help from the government. Given that more than 30 states have legalized marijuana for medical purposes (and 19 have legalized it recreationally), there are plenty of markets for the company to expand into today. But Curaleaf has burned through $89 million over the trailing 12 months from its day-to-day operations, meaning it has to be careful in picking its spots, since too much of a drain on cash could create problems.
Marijuana reform could not only help improve its financials but also allow Curaleaf to expand at an even faster pace. And that’s why holding shares of this pot stock before reform actually happens could lead to some fantastic returns for investors.
This article represents the opinion of the writer, who may disagree with the official recommendation position of a Motley Fool premium advisory service. Were motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.