The artificial intelligence (AI) boom of 2023 has taken the world by storm. As the AI trend looks set to continue into next year, other undervalued stocks might be overlooked amid this hype.
Following a meteoric rise in 2021, cannabis stocks are going through a tough time. Nonetheless, the industry as a whole is thriving. The only factor thwarting the growth of cannabis companies now is federal legalization. Cannabis is a drug containing tetrahydrocannabinol (THC), a psychoactive substance that produces a "high" when consumed. As a result, it is subject to stringent regulations. However, it has been established that the drug has numerous medicinal benefits, which is likely why there is widespread support for federal legalization. According to a recent Gallup poll, roughly 70% of Americans believe cannabis should be federally legalized.
Furthermore, Jaret Seiberg, a policy analyst at TD Cowen, thinks that cannabis legalization is not a question of “if” but rather “when.” The analyst believes cannabis legalization is unavoidable, even if it could take a bumpy few years to get there.
I believe these two cannabis operators are strong enough to survive the bumpy ride and thrive when the cannabis industry reaches its full potential. Let’s dig in deeper to find out why these might be good choices for investors who still believe in the cannabis industry’s potential.
Green Thumb Industries
While everyone is aware of the popular cannabis players Aurora Cannabis (ACB) and Canopy Growth (CGC), lesser-known players such as Green Thumb Industries are faring much better financially.
With 90 stores nationwide, Green Thumb Industries (GTBIF) has been GAAP (generally accepted accounting principles) profitable for three consecutive years since 2020. Analysts expect Green Thumb to turn a profit both in 2023 and 2024, with a gradual increase in revenue.
Furthermore, despite ongoing challenges in the U.S. cannabis industry, the company's revenue has increased from $216 million in 2019 to $1.0 billion in 2022. Much of this can be attributed to the company's astute strategy of expanding at a steady rate while not straining its balance sheet. Green Thumb was also wise to capitalize on limited license markets that allow only a select group of cannabis operators to operate. This strategy enabled it to build a loyal customer base, which increased revenue.
In the recent third quarter, net revenue increased 5.4% to $275.4 million, with a GAAP net income of $0.05 per share. Green Thumb’s shares have risen 32% YTD, compared to the S&P 500 Index’s ($SPX) gain of 24%.
Green Thumb's trajectory in the cannabis industry has been impressive. With a robust foundation, a diverse product portfolio, and a forward-thinking approach, the company appears well-positioned for sustained growth. While it continues to expand rapidly, its debt-to-equity ratio of 0.31 implies that it has been smart with its finances. Management expects the balance sheet stability to continue into next year.
Turning to Wall Street, Green Thumb stock has a “strong buy” rating from the analyst community. Nine out of 11 analysts covering the stock rate it a “strong buy,” while two rate it a “moderate buy.” The average analyst target price of $15.38 implies a potential upside of 35% in the next 12 months.
Cresco Labs
With 70 stores nationwide now, multi-state operator Cresco Labs (CRLBF) is slowly emerging as a prominent cannabis player in the U.S.
An oversaturated cannabis market in the U.S. continues to affect cannabis operators’ revenue, and in the third quarter, Cresco’s revenue dipped to $190.5 million, versus $210 million in the year-ago quarter. Adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) in the quarter came in at $49 million, up from $42 million in Q3 2022.
Cresco’s shares have lost almost 19% YTD, lagging the broader market.
Cresco is concentrating on closing low-performing cultivation and distribution facilities in a few states and paying attention to states where it can gain the most. Cresco’s diverse product portfolio and strong market presence in several states where cannabis is legalized position it favorably for continued growth.
However, Cresco has to be cautious about not overburdening its balance sheet. Its debt-to-equity ratio of 1.22 indicates that the company is heavily dependent on debt for expansion. It ended the quarter with cash and cash equivalents of $113 million and long-term debt of $490.5 million. The goal for Cresco now is to be profitable and generate free cash flow to be able to repay its debt.
When it comes to consumer goods like marijuana, customer loyalty plays a huge role in boosting revenue. Cresco’s popular brands, such as Mindy's, Good News, and High Supply, could help the company grow its revenue. For the full year 2023, analysts expect Cresco’s revenue to dip 9.2% to $764.3 million.
Overall, Wall Street remains optimistic about Cresco's long-term prospects, rating it a "strong buy.” Of the nine analysts covering CRLBF, six have a “strong buy” recommendation, one has a “moderate buy” rating, and two suggest a “hold.” The average price target of $3.55 represents a potential upside of about 153% from current levels.
The Bottom Line
As more states in the U.S. and other countries move toward cannabis legalization, both Cresco Labs and Green Thumb stand to benefit from an expanding market. The global cannabis market is estimated to be worth $102.9 billion by 2028, growing at a compounded annual growth rate of 15%.
Furthermore, the evolving societal attitudes toward cannabis contribute to a growing consumer base. Medical applications of cannabis, coupled with increased acceptance of recreational use, indicate substantial market potential for cannabis operators in the near future.
Cannabis companies may not be the most appealing growth stocks right now, with the stock market brimming with high-flying AI stocks as alternatives. Nonetheless, I, like Wall Street, believe in the long-term potential of this industry. As a result, companies such as Cresco Labs and Green Thumb Industries may be a good choice for patient and growth-oriented investors with a high risk tolerance.
On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
