Top 5 Pot Stocks for 2020

Although 2019 was a very tough year for the cannabis industry as a whole, we believe that 2020 offers significant upside for investors. We have identified the 5 best pot stocks primed for significant growth in 2020.

2019 was a very difficult and testing year for even some of the best pot stocks. The market peaked in early Q1 before going on an 8-month decline to end the year more than 50% down. The industry was rocked by many events including fraudulent growing by CannTrust, Canopy Growth firing Bruce Linton, the vaping crisis that spread across the US, and most importantly, the ongoing capital crunch that all cannabis companies are facing.

Looking forward, in 2020 we foresee a couple of catalysts that should have a positive impact on the industry. These include movements in legislation in the US through the passing of the SAFE Banking Act and potentially the MORE Act. To date, the Canadian recreational market has been disappointing with a lack of retail outlets and products significantly hindering its growth, but the legalisation of edibles and extracts in October 2019, with products on shelves in January this year, should give impetus to this market.

In looking at which are some of the best pot stocks that could perform really well in 2020, we considered many factors, but ultimately it came down to a few things. Most importantly – given the current capital crisis and how hard it is for cannabis companies to raise money – cash in the bank was a major consideration. All of our five picks are well funded and should have enough gas in the tank to survive this crisis.

And secondly, we considered the markets they operate in. All but MediPharm Labs operate in the US market and we believe the US offers investors a far greater upside in the coming 12 months than Canada. So without further ado, here are our top 5 best pot stocks for 2020.

Disclaimer: Past performance is not an indicator of future performance.

Trulieve

Trulieve is the undisputed market leader in the State of Florida, benefiting from their first-mover advantage, and one of the best pot stocks around. With 39 operating cannabis dispensaries in Florida (and one each in Connecticut and California) the company is also set to expand into the lucrative Massachusetts market (early 2020) where they are building out both cultivation and retail facilities.

Trulieve operates a model whereby they cultivate, manufacture and supply only their own cannabis through their chain of retail stores. They have over 1.7 million square feet of production and cultivation capacity in Florida and have the ability to harvest about 63,000 kilograms of cannabis per annum. This is in addition to the 55,000 square foot of processing capacity, which produces its significant SKU range of over 260 products.

In its latest quarter, it continued the trend of strong top-line growth but with a profitable bottom line. Revenue of $70 million represented an increase of 22% over the previous quarter with adjusted EBITDA coming in at just over 17%. Their dispensary count increased 14% over the previous quarter and 102% over the previous year. An indication of just how well run these dispensaries are run, is the fact that revenue growth outpaced store growth, meaning their revenue per store is also increasing.

The company is one of a very select group of cannabis companies that are actually generating a profit and not burning cash like it's going out of fashion. This has significantly assisted the company to raise capital at very favourable terms despite the current capital crunch constraining many cannabis company's abilities to raise capital. Trulieve has over $100 million in the bank and convertible debt that does not expire until 2024, giving the company more than enough time to repay these debts. 

The company continues to strengthen its position, and with Florida set to potentially legalise for recreational use in the coming 12 months, Trulieve is in a prime position to leverage its footprint to take advantage of what will be one of the largest recreational states in the US. We are extremely bullish about the company and believe this offers investors one of the best pot stocks in the market.

Why we like Trulieve

  • Florida's undisputed market leader and with recreational legalisation the horizon is well placed to further increase their dominance
  • Company is cash flow positive and continues to grow its top line
  • A very strong management team and extremely well funded.

Disclaimer: Past performance is not an indicator of future performance.

Green Thumb Industries

Green Thumb Industries is a US Multi-State Operator (MSO) with retail outlets in ten states, covering 32% of the US population.  They currently operate 41 dispensaries (both recreational and medicinal) and with a total capacity of 101 licenses. The key to becoming one of the best pot stocks is their focus on operating in limited-license states, such as Illinois, Massachusetts and New Jersey. 

In addition, they also wholesale their products to other retail outlets and dispensaries, giving the company maximum coverage in all States it currently operates in. This strategy alone makes this one of the best pot stocks for 2020.

In Illinois, GTI has seven operating dispensaries and sells its products wholesale to every other dispensary in the state (totalling 55). With recreational cannabis legalised from the first of January this year, the company was issued an additional five dispensary licenses (two of which are now open) and will be able to sell recreational cannabis through their existing medicinal footprint.

In Pennsylvania, the company has nine dispensaries open, with licenses for an additional nine. Just like Illinois, Green Thumb also sells its products wholesale to other dispensaries, and now covers 98% of the available retail outlets.

In Massachusetts, they currently operate one retail outlet with licenses for an additional two dispensaries. Massachusetts is expected to be one of the most lucrative states (given it is also recreationally legal) and Green Thumb has earmarked this state for aggressive growth and expansion. And finally, in New Jersey, the company has three dispensary licenses (one store open) and a cultivation license, with construction underway on the facility in Patterson.

Financial results continue to be very strong with significant quarter on quarter growth. In their latest quarter, the company reported $68 million in revenue – an increase of 51% over the previous quarter, and a whopping 296% over the corresponding quarter last year), with gross margins of 51% placing them behind only Trulieve. This growth was driven by the ever-increasing sale of GTI's products in third party retailers and increased retail store growth in traffic and revenue.

At the end of the quarter, the company had cash in the bank of just over $66 million and long term debt of $96 million. With its current quarterly cash burn being very modest, the company is well funded for expansion in 2020.

We believe that at the current price, GTI offers investors a significant upside as the US market continues to mature and legislation changes move ever closer to full federal legalisation.

Why we like Green Thumb Industries

  • Well run company that has found the perfect balance of organic growth and aggressive growth through acquisition
  • Well placed to take advantage of the recreational markets in Illinois and Massachusetts and well placed to grab further market share as the East Coast continues to open up
  • The wholesale revenue model means that GTI can continue to increase market share in the states it operates in. 

Disclaimer: Past performance is not an indicator of future performance.

Botanix Pharma

Botanix Pharma is a cannabis biotech company that is focussed on the development of CBD-based drugs for the treatment of a range of dermatological diseases, including acne, atopic dermatitis and psoriasis.  The addressable market for acne and atopic dermatitis are over $8 billion in size and no new drugs have been developed for these diseases in over 20 years. This is probably one of the best pot stocks in terms of the potential for gains in 2020.

Botanix does not use CBD from the actual cannabis plant, but rather synthetic CBD, which has itself just been legalised in the US. CBD has a very well established safety profile, has been documented to have a significant impact on inflammatory diseases and has antimicrobial properties meaning it kills bacteria and infections that might otherwise have developed resistance to certain medications.

All products made by BOT utilise synthetic CBD in conjunction with PermetrexTM skin delivery technology. PermetrexTM is a dermal delivery formulation technology that allows 10 to 20 times more of the active ingredient to get through the skin to better treat the disease. BOT has exclusive rights to this technology, developed by Dr Eugene Cooper, for all drugs that treat dermatological conditions.

Their two primary assets are BTX1503 (targeting acne) and BTX1204 (targeting atopic dermatitis). The key to both of these diseases is the necessity for longer-term treatment. However, the current incumbent drugs cannot be taken for long periods of time as they produce significant side effects and safety issues. The safety profile of CBD means that BOT's drugs can be used for extended periods of time with almost no side effects. This is game-changing!

BTX1503 is BOT's leading asset targeting the multi-billion dollar acne industry. Acne is one of the most common dermatological disorders, affecting nearly 10% of the global population, and approximately 50m people in the US alone. Recently the results of the Phase 2 study were released, and although the primary endpoint was not statistically significant (as the vehicle – think placebo – also produced remarkable efficacy), the company identified the manufacturing issue leading to this anomaly and has already made the decision to move to a Phase 3 study which should – post an FDA review in the first half of 2020 – commence later this year.

BTX 1204 is BOT's second asset developed for the treatment of atopic dermatitis (AD)—a chronic skin condition usually diagnosed during infancy—in a market that is predicted to grow by a CAGR of 12.8% in the coming 5-10 years. BTX1204 is currently in Phase II clinical trial with the results expected in late Q1 this year. The company has confirmed that they do not foresee the vehicle issue occurring in this trial due to a different formulation and the nature of AD. This should be a massive catalyst for the stock and everything we have read and been told points to a successful Phase 2 endpoint on this.

Should BOT deliver successful endpoints on the Phase II trial, it could mean $1 billion in revenue over the coming 10 years (and that's just one drug in their pipeline). The premise behind all of the treatment options is that CBD is very effective as an anti-inflammatory treatment mechanism, and has anti-microbial properties (meaning bacteria are killed rather than becoming antibiotic-resistant). The combination of the two means that their topical creams are showing the same treatment results as the incumbent drugs, but…with no side effects. Like we said, one of the best pot stocks in the market today.

Why we like Botanix Pharma

  • Targeting two of the most common dermatological conditions with a total addressable market of over $8 billion
  • Exclusive global rights to use PermetrexTM delivery technology which is one of the primary factors in the successful outcomes of the clinical studies
  • A very deep and strong pipeline of other drugs targeting other skin diseases like Psoriasis and Rosacea
  • Strong management team with a proven track record of success in the drug development industry

Disclaimer: Past performance is not an indicator of future performance.

MediPharm Labs

MediPharm Labs is a global leader in research-driven, pharmaceutical quality cannabis extraction, distillation and derivative product production. Since listing in early 2019, the Canadian Licensed Producer (LP) has been one of the best pot stocks of the Canadian Cannabis Industry. Its sales and profitability continue to grow, and it operates in the fastest growing sector of the fastest growing industry on the planet.

The company operates an asset-light model by setting up supply chains with local producers and avoiding the CAPEX-rich strategy of building our massive cultivation facilities. It represents the best value amongst its Canadian LP peers, with an EV/Sales ratio of 3.2x. MediPharm Labs was one of the best pot stocks of 2019, bucking the trend and actually increasing in value over the year, and we believe this trend will continue in 2020.

Having established a solid presence and brand in the Canadian market, the extraction powerhouse has now turned its attention (as have many of the LP's) to the international market. Currently, this strategy is a two-fold one. The first is to increase the opportunity for exports into the very lucrative European market via its pursuit of becoming eu-GMP certified. And secondly, it has significantly advanced its presence and development in the Australian market.

The company has set up shop in Australia under MediPharm Labs Australia where it has built a state of the art extraction facility. The 10,000 square foot facility, based in Wonthaggi, Victoria, and features supercritical CO2 extraction capacity to process up to 75,000 kg of dried cannabis annually as well secondary processing equipment for the manufacture of purified and high-concentrate cannabis distillate. The facility was officially commissioned in late 2019, and already, off-take agreements have been secured with leading Australian LPs.

In late 2019, the company commenced work on the expansion of their facility in Barie Ontario. The 75,000 square foot facility will now be expanded by just over 25,000 square foot and with a total extraction capacity of over 300,000 kilograms of oil per annum, it strengthens their position as the market leader in extraction capacity in Canada.

Their latest financial results were impressive to say the least. Gross revenue of $43 million marked an increase of 38% of the previous quarter, with they maintained their gross margin at a very respectable 34%. The real highlight was the fact that the Licensed Producer was able to generate a positive EBITDA of $10 million, a far cry from the rest of the Canadian LP's who are all burning excessive amounts of cash.

At the end of the quarter, the company had $42 million in cash in the bank. In June 2019, MediPharm Labs undertook an equity offering and raised over $70 million. This, in addition to the fact that the company is EBITDA positive, means the likelihood of an additional raise this year is low.

Going forward we expect the company to continue to drive both revenue and profitability through tolling agreements and the expansion of its white-label offerings. The legalisation of edibles and extracts in Canada in October 2019 provides the foundation for significant growth as high-potency oils and vapes take centre stage. However, this legalisation also poses the greatest threat to the company's short-term performance as the growth of the Canadian market has been exceptionally slow to date.

Why we like MediPharm Labs 

  • The market leader and one of the best pot stocks in the fastest-growing sector of the industry
  • Well funded and extremely profitable
  • Huge opportunity for international expansion and growth, with Australia the potential gateway to Asia

Disclaimer: Past performance is not an indicator of future performance.

Cresco Labs

Cresco Labs is a US Multi-State Operator (MSO) with 20 dispensaries (27 Pro-forma if one considers their pending acquisitions) and licenses for an additional 32 (60 Pro-forma), and one of the best pot stocks currently operating in the US. Cresco is operational in seven U.S. states, with binding transactions pending in New York and Massachusetts, as well as approved expansion into Michigan. The company's two primary states are Illinois and Pennsylvania (like Green Thumb) and they have the maximum allowable licenses in both states. 

However, Cresco is slightly different from some of its peers in that its long term focus is on the creation of consumer brands and the distribution of those brands to third-party dispensaries. The company believes the future of the industry is not retail, but rather the range of products and brands sold through those retail channels. Essentially, Cresco is looking to replicate the Coca-Cola model (manufacturing and distribution).

Although their strategy does not require retail outlets, the company has aggressively expanded its reach and number of dispensaries over 2019. The company uses these as the platform to launch their brands and gain eventual brand recognition in the mind of the consumer. In November 2019 the company launched its Sunnyside brand, with the first store location in Philadelphia. The company aims to open an additional five dispensaries in Illinois in Q1 this year and to pass the 60 mark by the end of Q2 (very aggressive targets).

The Illinois market is deemed to be a very lucrative one with recreational sales beginning on January 1 this year. In the first five days, sales smashed through the $10 million mark, and Cresco is extremely well placed to take advantage of this booming market. The company estimates the size of the Illinois market to be worth $2 to $4 billion per year.)

In keeping with the Coca-Cola "model", the company recently completed its mega-acquisition of California-based Origin House (previously CannaRoyalty). The deal, originally announced in April 2019, has now been completed at a value of close to $800 million. This deal gives them access to the largest distributor on the West Coast, but might also impact their bottom line, as Origin's gross margins and cash burn are not great (distribution margins are by nature very small). However, in terms of a strategic fit, it's a massive tick.

In their most recent quarter, they reported revenue of $36 million (a 20% increase over the previous quarter and 184% up on the previous year) with an associated gross profit margin of 47%. If one considers the pending acquisitions, then Pro-forma revenue increased over 48% to $73.6 million putting the company on an annualised run rate just shy of $300 million. 

With positive operating income of $6 million and adjusted EBITDA of $13 million, they are one of the few MSOs that are 'profitable' (adjusted EBITDA can be misleading and although there was a loss, it was very minimal). The company ended the quarter with total assets of $416.5 million, including cash and cash equivalents of $73.7 million and a working capital position of $144.6 million with zero debt on the balance sheet. Well cashed up, and with a solid business model, this is one of the best pot stocks to take advantage of the booming US market.

Why we like Cresco Labs

  • Very strong presence in key East Coast markets
  • A differentiated business model that is further accelerated by their Origin House acquisition
  • Strong cash balance and a superb management team.
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Mark Bernberg
Mark Bernberg

Mark Bernberg is a long-time cannabis investing enthusiast and founder of The Green Fund, Asia Pacific's preeminent media house, positioned at the forefront of the global cannabis industry.

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