The US federal government considers marijuana a Schedule I drug, along with heroin and cocaine. Schedule I classification means that government laws define marijuana as a drug with a higher potential for abuse and little medicinal value To use. Meanwhile, as of 2022, 37 US states have legalized cannabis for medical use, and 19 have legalized recreational use.
Cannabis companies have sprung up like weeds in recent years, with the market leaders trading on the stock exchange. Pot stocks are highly speculative as their success depends on U.S. federal legalization, which remains elusive in August 2022. The differences in federal and state laws create serious obstacles to the burgeoning pot business and hamper traditional bank financing and customer service. Federal law prohibits dispensaries in states that have legalized cannabis from accepting credit cards. You can only collect cash or charge customers’ debit cards. Transporting cannabis across some state lines from production to points of consumption can result in severe penalties for illegal trafficking when crossing state lines where cannabis remains illegal.
As of early August 2022, Curaleaf Holdings, Inc. (OTCPK:CURLF) is a leading cannabis company with the highest market cap compared to 29 companies in the industry. A catalyst could propel the stock higher after falling steadily since early 2021.
Pot stocks have gone up in smoke, and CURLF is no exception
Tom Petty, the late rock and roll icon, wrote: “The waiting is the hardest part.” Investors in pot stocks have increased “it on faith“and have taken”it to the heart“, as they’ve seen their investments go up in smoke since early 2021.
There was high hopes the new Biden administration will legalize cannabis in early 2021, shortly after the 46th President takes the oath of office. However, the bluntly The power of inaction prompted the leading cannabis companies to do so burn cash, and lack of legislative initiative stoned the asset class.
Curaleaf Holdings is the top U.S. cannabis operator, and its stock has disappointed investors since February 2021 high.
The chart shows the fall from the February high of $18.38 to a low of $4.7945 in mid-July 2022. After falling 73.9%, the stock was not far above the low of $5.67 on March 8. traded Aug.
Tilray (TLRY), another top pot stock, fared even worse, falling from $67 in early 2021 to $3 in July, down 95.5%. TLRY shares reached $300 in September 2018.
CURLF has the leading market capitalization of 29 companies in the industry
The latest top publicly traded cannabis companies are:
The chart shows that CURLF is the leader out of 29 companies in the cannabis sector with a market cap of $4.06 billion, which is 17.32% of the total value of the top 29 companies. CURL is the only company with a market cap of over $2.5 billion.
The main catalyst: Hunger for US federal tax revenue
CURLF has a significant market share but stock performance has been abysmal. However, there is hope that the buzz will return to the stock and propel it higher if the US government decides its thirst for revenue will never end.
The recent legislation and victory for the Biden administration is a stripped down Build Back Better program that addresses climate change, raises corporate taxes and reimburses the Internal Revenue Service to bolster tax revenues. The U.S. marijuana industry now suffers from a lack of state and federal coordination that would open the floodgates for traditional funding and revenue collection. Additionally, it would allow the federal government to collect excise taxes on marijuana, pay for new spending, and reduce the deficit. The ultimate catalyst for CURLF and the many other cannabis operators is action from Washington, DC. The wait was the hardest part and continues in August 2022.
CURLF gets good marks and operates in two segments
The search for Alpha’s quant rating for CURLF stocks is currently on hold.
Factor scores have improved but revisions remain problematic, likely a function of cash burn. The company receives its highest growth rating.
In the first quarter of 2022, the company reported normalized actual earnings per share of 2.0 cents per share, but exceeded actual earnings per share by one cent. Revenue was $313.07 million, which was $2.64 million below consensus estimates.
The market had expected CURL to earn one cent in normalized EPS and lose three cents per share in GAAP EPS in the second quarter, with consensus for earnings coming in at $335.30 million. The number came to $337.553 million. While net loss per share was four cents, CURLF grew revenue 8% in the second quarter, adjusted EBITDA for the second quarter of $86 million was up 18% sequentially and up 2% year over year, and that Company generated $12 million in positive operating cash flow for the first half of 2022. As with all companies, inflation impacted results as “SG&A expenses due to increased headcount to support new store openings, higher spending related to research and development activities, as well as higher sales and marketing expenses and an increase in fees.“
The data isn’t terribly optimistic, but prospects for legalization put the stock at $5.65 per share on Aug. 8.
Curaleaf operates in two segments, cannabis and non-cannabis. The Cannabis segment produces and sells marijuana through retail and wholesale channels. The non-cannabis segment provides professional services including cultivation, processing, retail consulting, back-office management, intellectual property licensing, real estate leasing and lending for medical and adult cannabis licenses under management service agreements.
As of June 16, 2022, CURLF operated 134 dispensaries and 26 cultivation sites in 22 states. Further growth of the cannabis sector depends on US federal legalization. The non-cannabis sector could accelerate sales and growth in the coming quarters given the company’s expertise in marijuana services. In addition, CURLF’s inexpensive market capitalization and leadership position make it an attractive acquisition candidate that could offer increasing returns to an acquirer.
The Crème de la Crème – The tip of the bud at risk while tobacco companies wait in the wings to soak up the leftovers
CURLF is an attractive company in a troubled industry waiting for the US federal government to legalize its products. The prospect of new tax revenues from legalization could open a floodgate for the marijuana industry, with the leading companies taking the lion’s share. It could also attract new well-capitalized companies looking to buy into the sector through aggressive acquisitions.
Tobacco companies are the leading candidates for M&A activity.
The chart highlights two of the top three tobacco companies, Philip Morris (PM) and Altria (MO), with a combined market capitalization of $231.26 billion, or just over 50% of the top 16 publicly traded tobacco and cigarette companies. Meanwhile, six of the top 16 are US companies, but the other four have market caps under $1.3 billion, lower than CURLF. PM and MO are candidates for aggressive acquisitions in the post-federal cannabis sector, and CURLF is a leading target.
Pot investors have been patient and persevering since stocks made lower highs and lower lows since early 2021, when hopes of impending legalization went up in smoke. The wait was the hardest part, but it might be worth it if Washington DC decides tax revenue is too hard to ignore.