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Earnings Forecasts for U.S. Pot Stocks Are Starting to Crumble

Sean Williams, The Motley Fool

When it comes to the fastest growing industries on the planet, the green rush certainly has its place. After posting $10.9 billion in worldwide legal sales last year, the global cannabis industry could grow into a $50 billion to $200 billion industry by the end of the next decade. At $200 billion a decade from now, the pot industry would be delivering a compound annual growth rate of roughly 34%.

But when we're talking about growth in the cannabis industry, we're really discussing the potential of the U.S. market, which should account for somewhere between a third and half of global weed sales. Investment bank Stifel, which put out the aggressive note to clients calling for $200 billion in worldwide sales, predicts that the U.S. will be responsible for $100 billion of this annual total. That makes U.S. pot stocks particularly attractive to long-term investors.

A black silhouette of the United States partially filled in by cannabis baggies, rolled joints, and a scale.

Image source: Getty Images.

U.S. cannabis stock profit forecasts for 2020 are tumbling

However, we've been witnessing an odd bifurcation in U.S.-focused marijuana stocks of late. Though sales estimates over the long run remain robust, profit projections for 2020 have begun to crumble. Here's a snapshot of what Wall Street expected a number of popular multistate dispensary operators to earn in fiscal 2020 three months ago:

  • Green Thumb Industries (OTC: GTBIF): $0.40 per share.
  • Cresco Labs (OTC: CRLBF): $0.39.
  • Acreage Holdings (OTC: ACRGF): $0.33.
  • Trulieve Cannabis (OTC: TCNNF): $0.80.
  • MedMen Enterprises (OTC: MMNFF):  a $0.02 loss per share.

And here's a look at what Wall Street now expects from these prominent vertically integrated operators in fiscal 2020:

  • Green Thumb Industries: $0.24 per share.
  • Cresco Labs: $0.34.
  • Acreage Holdings: $0.28.
  • Trulieve Cannabis: $0.72.
  • MedMen Enterprises: a $0.14 loss per share.

In each and every instance, Wall Street has modestly to significantly tempered its profit expectations for some of the largest multistate dispensary operators. How is this possible, given the robust growth expectations for the United States' marijuana market? Let's take a closer look.

Scissors cutting through a one hundred dollar bill.

Image source: Getty Images.

U.S.-focused pot stocks are losing their luster for a variety of reasons

While the U.S. cannabis market would clearly dwarf all others, there are a number of issues to contend with that Wall Street has begun factoring into previously aggressive growth estimates.

To begin with, high tax rates on recreational marijuana have been more of a nuisance than most folks realized. In California, the state projected to lead all other in total legal weed sales, collected tax revenue came in way below initial projections in 2018. The problem appears to be that aggregate taxation on cannabis is just far too high to sway consumers to use legal channels. Between state, local, excise, and wholesale taxes, consumers could be on the hook for a tax rate of up to 45% in California. And, mind you, this doesn't factor in licensing costs and regular lab testing that needs to be done on legal marijuana, which is also passed along to consumers in the form of higher prices. California's tax woes are especially worrisome for Cresco Labs and MedMen, which expect to generate significant sales from the Golden State.

Another problem is supply in certain legalized states. Oregon, for example, did implement a temporary moratorium on issuing cultivation licenses as of mid-June. However, there are already far too many growers in the state, and potentially enough cannabis in inventory to last for years. Oversupply has the potential to cripple per-gram pricing and can put financially unprepared marijuana companies out of business.

A drug free zone sign in a quiet neighborhood.

Image source: Getty Images.

On the other end of the spectrum, certain states bear a burden for taking a long time to approve retail licenses for cannabis stores. California has nowhere near a full complement of licensed pot stores open for business despite recreational pot sales beginning more than a year and a half ago. Additionally, with jurisdictions able to choose whether or not recreational cannabis sales are allowed, most in California have put up barriers to entry for the legal weed industry.

Finally, the U.S. federal government isn't anywhere close to changing its tune on marijuana. Even though the House may push forward with a bill to reschedule marijuana or remove it from the controlled substances list entirely, a Republican-led Senate with Mitch McConnell (R-Ky.) as Majority Leader would never allow such a measure to hit the floor for vote. There's virtually no chance of legalization in the U.S. any time before 2021, and maybe even longer.

The right state of mind will allow investors to contend with near-term hiccups

Though the U.S. is contending with a slew of issues at present, the important thing for investors to understand is that this is par for the course when it comes to next-big-thing investments. Regardless of the industry, sector, or product/service involved, all need time to mature – and investors' expectations of the North American cannabis industry simply haven't been realistic.

But here's the good news: If investors approach U.S. pot stocks with a long-term time frame, then these recent issues shouldn't be too much of a long-term concern.

Clearly labeled jars packed with dried cannabis that are sitting on a dispensary countertop.

Image source: Getty Images.

For instance, you'll note that Wall Street expects four out of five of these multistate dispensaries to be profitable on a full-year basis, with Trulieve Cannabis being the cheapest pot stock on a forward earnings basis. With the exception of MedMen, which has been losing money at an alarming rate, Green Thumb, Trulieve, Cresco, and Acreage Holdings are all expected to be healthfully profitable with rapid sales growth.

In other words, sales metrics for these dispensary operators will be heading in the right direction. It's simply a matter of realizing that transitioning consumers from the black market to legal channels is going to take a bit longer than initially believed. As long as investors keep the longer-term picture in mind, this hiccup in 2020 profit forecasts shouldn't be a big deal.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com