Quick – what’s the best performing stock of all time?
Microsoft? Apple? NVIDIA? Ford? IBM?
Nope, not even close.
The answer might surprise you.
It’s Philip Morris, the maker of Marlboro cigarettes and other tobacco products.
A $1 investment in Philip Morris in 1925 would be worth around $2.5 million today (with dividends reinvested).
Every $1 invested in Philip Morris in 1980 would be worth $35,000 today (again, with dividends reinvested).
It’s the best compounding stock of all-time, and shows why we should reinvest our dividends where possible.
Philip Morris provided investors fat yields, consistent growth, and efficient operations for more than a century. (side note – Philip Morris has since split into PM International (PM) and Altria (MO) in the U.S.)
Tobacco is a straightforward business. Success requires streamlined operations, smart acquisitions, strong distribution, and top-tier branding.
However, tobacco is slowing down today, and growth isn’t what it once was.
But an opportunity is emerging in the marijuana space which is somewhat similar.
Today, we’re going to highlight a few cannabis stocks which could become the Philip Morris of marijuana.
But first, we need to go over why this opportunity is attractive right now.
Yuge Regulatory Changes
Yesterday President Trump signed an executive order speeding up the reclassification of cannabis.
Currently marijuana is classified as a Class 1 drug. The same as heroin.
This change would make it a Class 3 drug. The shift will be big for cannabis companies when it happens.
Currently marijuana stocks are operating with a brutal regulatory regime. Because cannabis is a class 1 substance, they’re not allowed to deduct normal business expenses on their taxes.
Not being able to deduct normal business expenses creates a situation where companies might be paying a 70% tax rate on profits. To be clear, most aren’t very profitable in this current regime anyway. They’re cut off from banking, and face stiff competition from both legitimate and black market products.
These changes will also allow far more research into legitimate medical uses of marijuana, of which there are many. For example: pain relief, anti-nausea, anti-inflammatory effects, anti-seizure effects, and more. This is the key reason President Trump cited.
To be clear, even after this change goes through, cannabis won’t be fully legal at the federal level. But it’s a big step, and eventually it seems likely that full legalization goes through nationwide. But probably not under Trump.
Surveying the Top Cannabis Stocks
Before we begin, a quick disclaimer. I am just beginning to dig back into cannabis stocks. I haven’t done a super deep dive on either of the companies I will mention today. We’re going to cover two of the largest stocks by revenue. So don’t rush out and buy them blindly. These are stocks to consider. And keep in mind, this sector is high risk, and high potential reward.
From late 2020 into 2021, marijuana stocks had a moment.
Retail investors, which dominate the cannabis sector, poured money in. Hope for rescheduling and full legalization was high.
Top U.S. player Curaleaf (OTC: CURLF) soared from a 2020 low of around $3 up to $16 (note – all U.S. cannabis stocks are forced to trade on the OTC market, they can’t list on major stock exchanges due to regulations. This could change in the future.)
Then, reality set in. Competition among cannabis companies jumped as capital flooded into the sector. Rescheduling didn’t happen (until now).
Today, Curaleaf is trading back at around $3.38. But they’ve had to issue a lot of new shares in the meantime, so the market cap is still around $2.5 billion.
Still, Curaleaf is a contender to become the Philip Morris of marijuana. Curaleaf owns 151 dispensaries (stores) and 19 cultivation/processing facilities in 17 states. They also sell and distribute dozens of branded cannabis products.
In the most recent quarter they reported $320 million in sales, so they’ve got a decent chunk of the market and are the largest U.S. cannabis stock in terms of revenue.
Curaleaf is not currently profitable, and growth is down slightly YoY. But with the largest footprint, strong distribution, and access to capital, they’re certainly in the running.
If we see a surge in mergers and acquisitions, Curaleaf is a top contender to gobble up struggling operations on the cheap.
And if governments ever begin to seriously crack down on black market marijuana, that would create a huge opportunity.
Additionally, if full legalization ever happens, the potential becomes massive. The scale would allow legal producers to slash costs and consolidate the industry.
Trulieve – Another Contender
Trulieve (OTC: TCNNF) is the third-largest U.S. cannabis operator by revenue. In the most recent quarter they produced $288 million in revenue. Its valuation is fairly cheap at 1.36x book value.
Trulieve owns 231 dispensaries and 15 cultivation/processing facilities. Like Curaleaf, they own and distribute dozens of branded cannabis product lines.
Trulieve revenue was up 1% YoY in the most recent filing. So despite serious headwinds, they’re showing at least some growth.
The slow/negative growth among top companies might be off-putting, but the cannabis industry is incredibly competitive in most markets. Prices are generally falling due to fierce competition from both legal and illegal operations.
Still, valuations are low compared to just a few years ago. And there’s potential for a “re-rating” if sentiment in the sector improves.
A friend of mine who is deep into the cannabis space likes Trulieve the most, for what that’s worth.
Closing Notes
The two companies we profiled today have been in a sustained bear market since 2021. However, in the buildup to Trump’s rescheduling executive order, they rallied.
But when Trump signed the EO yesterday, the sector fell sharply in a typical “sell the news” reaction. So there is currently a chance to buy the dip.
But don’t rush out and feel like you have to buy the sector immediately. It’s still a challenging environment for cannabis firms. But the outlook is improving.
And one more note – there are a number of ETFs in the space, including TOKE, YOLO, and MSOS, but I don’t recommend buying them. Due to federal regulations, they can’t own the actual stock of cannabis companies. They have to buy a derivative instrument which complicates the picture. I would avoid the ETFs in this space.
Today’s article was just an introduction. We’ll explore it from time to time, and I’ll share any noteworthy findings.
I believe there is a big opportunity in this space over the next decade. The company that wins the cannabis wars will have an opportunity to generate huge returns. Probably not as high as Philip Morris, but still very solid. In some ways it’s a similar business. It’s all about distribution, efficiency, and branding.
With Trump’s regulatory changes, sentiment on cannabis stocks is improving. And it’s even possible that we’ll see more institutional buying, which is essentially non-existent today.
We’ll keep an eye on this sector and report back soon.
