For those of you nauseated by the stock market volatility this year, understand that you have nothing on the roller-coaster ride that cannabis stock investors have been on since 2017.

Through the first quarter of 2019, marijuana stocks were virtually unstoppable. With tens of billions of dollars in sales being conducted each year in the black market, it seemed only logical that legalizing adult-use weed in Canada, and at the state-level in multiple U.S. states, would lead to rapid growth in legal pot channels. In many instances, all it took was a promise of capacity expansion or an acquisition announcement to send pot stock valuations to the heavens.

A gloved processor with scissors trimming a cannabis flower.

But a combination of expected growing pains and reality struck the sector in April 2019. For the following 15-month period, pot stocks were in a tailspin. Throughout North America, we've witnessed production facilities shuttered and layoffs made as cannabis stocks aim to bring output in-line with supply. In the meantime, most marijuana stocks lost 50% or more of their value.

Then July 2020 hit, and the sun shone brightly on pot stocks once again. Last month, 12 prominent cannabis companies delivered a double-digit return for their shareholders:

  • Planet 13 Holdings (OTC: PLNH.F): 77.9%
  • Curaleaf Holdings (OTC: CURLF): 38.3%
  • Cresco Labs (OTC: CRLBF): 38.1%
  • Green Thumb Industries: 34.2%
  • Trulieve Cannabis (OTC: TCNNF): 29%
  • GrowGeneration (NASDAQ: GRWG): 23.4%
  • Acreage Holdings: 22%
  • Harvest Health & Recreation: 19.2%
  • Innovative Industrial Properties (NYSE: IIPR): 18.4%
  • Scotts Miracle-Gro (NYSE: SMG): 17.9%
  • Canopy Growth (NYSE: CGC): 13.1%
  • Aphria: 11.3%

Why these marijuana stocks and not their peers? Let's take a closer look at a handful of trends that emerged from July.

A black silhouette outline of the U.S., partially filled in by cannabis baggies, rolled joints, and a scale.

The U.S. is kicking "bud" and taking names

If there's one thing that clearly stands out, it's that the 10-best performers from July are all U.S. marijuana stocks. Canadian regulators completely blew their country's chance at becoming a cannabis leader, which has opened the door for the U.S. to take its place, even if the federal government has stood pat on its classification of weed as a Schedule I (i.e. illicit) substance.

No matter who wins the White House in November, state-level legalizations are likely to continue in the United States. Despite having to set up potentially redundant cultivation and processing sites around the country, multistate operators (MSO) have shown that this can still be a high-growth and (eventually) profitable venture.

Cresco Labs, for example, is expected by Wall Street to grow its sales by 186% in 2020 and another 80% next year. Some of this sales growth has to do with Cresco closing on its acquisition of cannabis distribution company Origin House in January, which'll allow it to place its products into more than 575 dispensaries in California. Cresco is also benefiting from opening eight locations in Illinois, which began allowing recreational marijuana sales on Jan. 1, 2020.

The same can be said for Curaleaf, which leads all MSOs in operational dispensaries. Curaleaf completed its game-changing acquisition of privately held Grassroots on July 23, which increased its open dispensary count to 88. Curaleaf has the ability to open as many as 135 retail locations spanning 23 states. It looks like a sure shot to hit $1 billion in yearly sales in either 2021 or 2022. 

An indoor hydroponic-based cannabis grow farm.

Ancillary players in the growing space are performing well

Although ancillary players -- i.e., companies supporting the pot industry without touching the plant -- have been very hit-and-miss to this point, companies focused on helping indoor cultivators improve their yields, like GrowGeneration and Scotts Miracle-Gro, are doing extremely well.

What's particularly interesting about these returns is that we've seen Canadian licensed producers close some of their indoor greenhouses in favor of cheaper outdoor grow farms. The strength from GrowGeneration and Scotts Miracle-Gro would seem to imply that it's not entirely a price proposition when it comes to growing cannabis. Though value matters, quality will still be important.

GrowGeneration, which operated a little over two dozen hydroponic and organic garden centers at the end of March, reported 152% sales growth in the first quarter, with same-store sales growth of 58%. Yes, expansion is accounting for a lot of this growth, but 58% same-store growth is very impressive.

Meanwhile, Scotts Miracle-Gro released its results for the quarter ending on June 27 last week. Companywide sales soared 28% (Scotts generates most of its revenue from its traditional lawn and garden care segment), with Hawthorne Gardening revenue up 72% from the prior-year period. Hawthorne provides hydroponic equipment, lighting, nutrients, and soil solutions to indoor growers. These results allowed Scotts to, once again, bump up its full-year profit outlook. 

A cannabis leaf lying atop a neat stack of one hundred dollar bills.

Companies with no cash concerns are thriving

Another differentiating factor in July is that companies with no clear cash concerns did very well. As a reminder, most banks and credit unions in the U.S. won't offer loans and lines of credit to pot companies. Likewise, Canadian banks haven't exactly opened their vaults to licensed producers.

In the U.S., small-cap MSO Planet 13 skyrocketed in July after announcing the acquisition of 45,000 square feet of indoor cultivation space from West Coast Development Nevada in a cash-and-stock deal valued at close to $4.2 million. Planet 13 has had little issue raising capital when needed, and it's done an excellent job of connecting with its local Las Vegas community as tourism dried up due to the coronavirus disease 2019 (COVID-19) pandemic. Financing simply hasn't been a concern for this unique MSO.

North of border, Canopy Growth offers few near-term worries about its finances. The biggest pure-play pot stock by market cap ended March with $1.98 billion Canadian in cash, cash equivalents, and marketable securities. This is down considerably from more than CA$4.5 billion on hand at the end of 2018, but new CEO David Klein is cutting costs at a rapid clip. Canopy Growth has permanently closed 3 million square feet of licensed indoor greenhouse space in British Columbia this year, and laid off workers to reduce outlays. The important point being that cash is of little concern right now.

An accountant checking an income statement line by line with the aid of a calculator.

Profitability matters

Finally, never overlook the importance of profitability. Though most pot stocks are growing like weeds, few are generating real income. By "real income," I mean without the aid of one-time benefits or fair-value adjustments.

Take real estate investment trust Innovative Industrial Properties, which is forecast to top $3.30 in earnings per share (EPS) in 2020, per Wall Street's consensus, and deliver more than $5 in EPS next year. Innovative Industrial Properties' business model is very-low cost (beyond making property acquisitions) and generates plenty of predictable cash flow. Since the beginning of 2019, the company has grown its property portfolio from just 11 assets to 61 in 16 different states. As of July 20, more than 99% of its available square footage was leased out for a weighted-average length of 16.1 years. 

There's also MSO Trulieve Cannabis, which is the most profitable pot stock on a nominal basis. This Florida-focused vertically integrated company brought in almost $253 million in sales last year, with $86.6 million generating in operating income after costs of goods sold and operating expenses (but excluding fair-value adjustments). Out of Trulieve's 55 open dispensaries, 53 are located in the Sunshine State. By keeping its costs close to the vest, Trulieve has been able to effectively brand its product, keep its marketing costs down, and secure about half of Florida's medical pot sales in the process.

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