As one of the largest cannabis businesses by revenue, Green Thumb Industries (GTBIF 0.78%) is an obvious candidate for being a leading investment. But, as with many of the budding industry's competitors, the bear market was not kind to this stock.
While the new bull market could well help to undo some of the damage, and while the company could be on the mend even without it, it's important for investors to get an idea about just how volatile one of the more stable and more serious cannabis stocks can be. So let's do a quick calculation and determine how much money you'd have today if you had invested $1,000 in Green Thumb three years ago.
This investment was a doozy
Unfortunately, early 2021 wasn't the greatest time to invest in Green Thumb for reasons what were largely beyond its control. Your $1,000 purchase of its shares three years ago would now be worth only around $350. If you'd bought shares of an index fund and reinvested the dividends, you'd have closer to $1,320 instead. It's possible that the next three years will be better ones for this company's shareholders, but there are no guarantees, largely because the investment thesis for cannabis companies relies primarily on one assumption.
And that assumption is, if the federal government legalizes cannabis, it'll probably lead to a renaissance for marijuana stocks. Such an announcement, or even a buildup to the law changing, could trigger a large bump in their share prices on the renewed impetus that more value adding growth will subsequently follow as companies penetrate the newly opened markets. But while there have been a few rumblings to that end as of late, with a handful of different bills being introduced, there is still nothing concrete on the books, and given the many pressing national and international issues that are a higher priority for legislators to deal with at the moment, a resolution on marijuana legalization could continue to be deferred. The same goes for marijuana banking reforms that were being actively discussed just two years ago.
Fortunately, there's a lot that Green Thumb is doing to drive returns, even in advance of possible legalization. Aside from investing in developing additional marijuana product lines and brands, like the newly launched Swirled Famous Banana Pudding Bar from its Magnolia Bakery, it's securing retail and cultivation licenses in newly opened state markets like Connecticut and Maryland to make sure that it has the ability to open new locations without further regulatory delays. With more than 90 stores already in operation across the country, it's just a matter of time before the majority of the population is within range. After that happens, it'll be a long grind as the company seeks to consolidate its market share, build customer loyalty, and milk more money out of each of its locations with promotions and events.
Improvements may take time
Aside from appreciating the potential catalysts in play and the company's efforts to make headway in its markets, investors should recognize that a lot of patience will be required to stay invested in this business. As large as its runway for growth in the future may be, the business needs to go through the somewhat plodding process of actually capturing the growth, one sale at a time. Right now, sales have been plateauing over the last 24 months.
Analysts are expecting Green Thumb will boost its revenue by just 6.5% in 2024, meaning its top line will be around $1.1 billion. Assuming cannabis selling prices remain depressed in the U.S., it will be difficult for it to report profits rather than losses, at least without significant cost cuts. So if you're a shareholder sitting on some losses yourself, be aware that it will take a bit longer before there's a recovery.
On the bright side, Green Thumb lacks some of the issues that plague its competitors, like being stretched thin across multiple markets internationally, or being confined to a less-than-dynamic market without room for growth. Nor is it bogged down by external financial commitments or pending strategic deals. Lest those advantages seem trivial, keep in mind that this flexibility could be a major asset even if legalization takes much longer than anticipated.
Still, when it comes to the prospect of buying this stock, hold off for now. Wait until there's a higher chance of a major positive catalyst occurring in the near term, or until its pace of revenue growth picks up. That way, the risks of an investment will be closer to being within a tolerable range.
