The Biggest Cannabis “Multi-State Operator” Stocks

One difficulty investors face when trying to invest in disruptive technologies is that things rarely pan out as expected. Solar investors who thought they were being conservative by going long the Invesco Solar ETF (TAN) have been trounced over the past five years. The same holds true for the majority of those 3D printing stocks that were once high-flying momentum plays, only to be market laggards today. Even venture capitalists whose job is to pick winning startups only manage to get it right about one-tenth of the time. For retail investors, market timing can often decimate returns in the long run. The problem is compounded for first-time investors who haven’t learned how bad emotions can affect investment decisions. And nowhere did we see more first-time investors clamoring on board than in the world of cannabis stocks.

There’s been a fair amount of consolidation lately in the cannabis industry as the dust continues to settle. Larger players are getting larger and over-the-counter pump-and-dumps are starting to evaporate. When trying to compare players in the industry, there are now Key Performance Indicators (KPIs) we can use like kilos grown and sold or retail licenses granted. Following some fairly big acquisition announcements, The Motley Fool tallied up the biggest holders of retail licenses which – as of July 20th, 2019 – were said to be as follows:

  • Harvest Health (HARV:CN) acquired Verano Holdings – 142 licenses
  • Curaleaf (CURA:CN) acquired Grassroots – 131 licenses
  • Green Thumb Industries, Acreage Holdings (ACRG:CN), and MedMen Enterprises (MMNFF) all have close to 90 retail licenses (on a pro forma basis).

The Motley Fool has over 300 people and we have only a handful of underpaid MBAs so we’ll assume these numbers are correct and nobody was left out. If that’s the case, then we’re interested to learn a bit more about what companies are presently in the lead when it comes to selling cannabis in the United States of America across multiple states. Let’s take a look at the company with the most licenses today, Harvest Health.

Harvest – A Multi-State Operator

In July of this year, Harvest Health & Recreation received approval to acquire Verano Holdings. When acquisitions like this happen, the financials of both companies need to be consolidated in order to paint a picture of what the new entities look like. This means merging accounting systems so that accurate numbers can be used in financial filings going forward. This takes time, so companies often use something called “pro forma” numbers which represent a best guess of what the company will look like once all the corporate events have been successfully completed. Here’s a look at Harvest’s pro forma numbers for 2019 and 2020:

Harvest Health & Recreation Pro Forma Financials
Source: Harvest Health & Recreation

These numbers represent guidance for investors who now know what to expect once the dust has settled from the six pending acquisitions. Harvest currently operates 20 open dispensaries and has rights to 35 open dispensaries on a pro forma basis. This means by the end of the year they will have 60 stores across 18 states. (Industry lingo for such a company is Multi-State Operator or MSO.) Given that MSOs cannot transport cannabis across state lines, this usually means they’re vertically integrated which allows them to control the entire supply chain. It also means that to set up shop they require a great deal of capital to build out operations. So, is Harvest the biggest MSO today? It depends on what metric we want to use.

The Biggest – Operator Stocks

There are any number of ways that we can compare multi-state operators to determine who is the “biggest.” These might include:

  • Yearly Revenues – We could also use the latest quarterly and multiply by four to get forward-looking yearly revenues
  • Licenses – As we said at the beginning of this article, Harvest Health and Curaleaf are leading in this respect
  • Market Cap – This is the valuation the market puts on each company and is perhaps the most common way to compare the size of two companies
  • Open Dispensaries – The actual number of dispensaries that are presently open and bringing in revenues
  • Tons of Cannabis Grown – This metric could be used when a company grows product that gets sold through other channels

We also need to consider the sale of CBD products which are now being distributed through large retail chains across the United States. Therefore, it makes sense to look at market cap and revenues which would reflect the value the market places on the companies and the amount of money they’re generating through the sale of anything cannabis-related. Here’s a look at the largest MSOs by market cap according to a July presentation by Curaleaf:

Here is a list of these companies along with their associated stocks tickers and the number of U.S. states they’re presently operating in:

  • Curaleaf (CUR:CN) – 19 States
  • Cresco Labs (CL:CN11 States
  • Harvest Health (HARV:CN) 18 States
  • Acreage Holdings (ACRG:CN) – 19 States (Canopy Growth has secured a right to buy Acreage Holdings Inc for $3.4 billion once the United States legalizes the production and sale of cannabis.)
  • Green Thumb Industries – (GTII:CN) 12 States
  • MedMen – (MMEN:CN) 12 States
  • Trulieve – (TRUL:CN) 4 States
  • Columbia – (CCHW:CN) 14 States

It’s important to note that every single one of these stocks trades on a Canadian stock exchange because cannabis is illegal in the United States at a federal level. Also, every single one of these stocks appears to trade on the Over-The-Counter (OTC) market as a Global Depository Receipt (GDR) which means that a bank buys shares on the Canadian market and then offers them to investors on the OTC market. Given the sensitivities around the legalities of cannabis, U.S. based investors are best suited to simply buy shares in any of these companies on the Canadian stock exchange. One broker that lets you do this easily is Interactive Brokers. All you need to do is open an account, deposit money, buy Canadian dollars, and then you can buy shares in any of these companies easily. For example, we’re holding a few shares in Charlotte’s Web which we purchased around the time we wrote about Charlotte’s Web Stock – What’s a Fair Price?

Putting aside any notion of valuations or regulatory risk – largely because that’s what most cannabis investors prefer to do – any investor who wishes to get exposure to cannabis stocks in the United States would be best served buying an equally weighted portfolio containing all eight stocks listed above. However, it’s very early days. A market leader has not emerged yet, not even close. This becomes apparent when we look at the Total Addressable Market (TAM) for cannabis.

The Total Addressable Market

Figuring out the TAM for cannabis is a bit tricky because again, we need to figure out what metrics to use for measuring the total size of the market across all states where marijuana is legalized. Let’s forget about CBD for a moment and consider recreational and medical cannabis for which there is a great deal of variability between states such as:

  • Current status of legality
  • Number of licenses made available
  • Number of dispensaries actually in operation
  • The extent to which the population enjoys smoking cannabis

For any company, the upper limit here is the number of licenses they possess. For the TAM, it’s the number of licenses that a state has decided to make available. Let’s try to do some back-of-the-napkin math using the state where it all started – California – the first state to make medical marijuana legal.

Number of cannabis dispensaries in California cities
Credit: L.A. Times

According to an article by the L.A. Times:

A bill moving through the Legislature would require those cities to permit at least one cannabis retailer for every four bars or restaurants with a liquor license or one for every 10,000 residents, whichever is fewer. Assembly Bill 1356 would mandate 2,200 new cannabis stores throughout the state, more than three times the 631 shops legally operating now, state officials estimate.

The population of the State of California sits at 39.65 million people which means 2,831 dispensaries translates to 14,000 people per dispensary. However, in other states like Colorado, we see a much higher density of dispensaries.

The first two States to legalize recreational marijuana were Colorado and Washington. According to a High Times article in February of 2018, Colorado had 1,025 dispensaries with a population of 5.96 million which translates to one dispensary for every 5,814 people. What this tells us is that cannabis culture can be expected to differ between states with some requiring more dispensaries than others. Let’s be more conservative and use California’s numbers – one dispensary per 14,000 people.

Using Curaleaf as an example, the 19 states they operate in could then support 12,642 dispensaries (177 million people/14,000 people per dispensary.) So, Curaleaf’s market penetration with 131 licenses is minuscule at around 1%. As we said before, the upper limit for any MSO is the number of licenses they hold, the exception being CBD products since distribution can happen across all states and through channels other than dispensaries.


What’s most exciting to see is the consolidation happening in the cannabis industry because this means tracking cannabis stocks becomes a whole lot easier. It’s also interesting to see that large Canadian players like Canopy Growth are tepid about dipping their toes into the United States cannabis market and announcing acquisitions that can only happen “once the United States legalizes the production and sale of cannabis.” Should the United States decide to make cannabis legal, the entire landscape will then shift dramatically as companies start to move product across state lines, list their stocks on United States stock exchanges, and move away from operating cash-only businesses. When the regulatory risk evaporates completely, large corporations like Constellation Brands may also enter the game making the overall winners even more difficult to predict.

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