Like many firms in other industries, cannabis companies have been struggling with high inflation adding to their costs. But marijuana companies also face a host of headwinds unique to them.(GETTY IMAGES)
Stocks of legal marijuana companies are in a slump, and the near-term outlook is hazy.
But while 2023 might not be a year to buy in expectation of rapid gains, this could be a great entry point for purchasing some solid cannabis stocks at a discount and holding them in anticipation of eventual federal legalization in the U.S., the world’s biggest pot market.
The New Cannabis Ventures global cannabis stock index is down about 65% over the past year through March 1, compared with a roughly 10% slide for the broader market, as measured by the S&P 500.
“We remain optimistic about cannabis stocks, and we think that these dips should generally be bought,” New Cannabis Ventures analysts said in a recent newsletter.
These are the top marijuana stocks to buy:
Headwinds for Cannabis Stocks
Like many firms in other industries, cannabis companies have been struggling with high inflation adding to their costs. But marijuana companies also face a host of headwinds unique to them, including competition from the illegal market and falling prices for marijuana because of competition and oversupply.
In Canada, despite federal legality, the industry has been weighed down by high taxes. In the U.S., where the drug remains federally illegal, taxes are also high, and the industry faces onerous hurdles to financing from banks. Because of federal illegality in the U.S., plant-touching companies can’t list on major exchanges, and many institutional investors don’t want to buy shares of companies trading over the counter, limiting marijuana firms’ ability to raise money.
“In the U.S., the industry continues the challenge of operating under the shadows of federal law, and uncertainty as to the nature, extent and timing of federal reform continues to weigh on investor sentiment,” said Matt Karnes, founder of consultancy GreenWave Advisors LLC, adding that some cannabis companies pay upward of 70% of their operating cash in taxes.
In the face of federal prohibition, investors worry about the future of many of the public companies unless they get bought or receive outside capital, he said.
“From a stock perspective, the marijuana industry has not experienced the same bounce back that other beaten-down sectors have experienced since the market’s bottom in October,” said Tom Bruni, senior writer for The Daily Rip & Markets newsletter at Stocktwits. “Part of that is because, from a regulatory or business standpoint, there have yet to be any significant catalysts to spark a renewed interest in the space.”
Considering Multistate Operators
For investors trying to gain exposure to weed through cannabis stocks, large marijuana companies that operate in more than one U.S. state where the drug is legal – known as multistate operators, or MSOs – offer advantages for those willing to buy shares and hold them for what will likely be a considerable time.
Top-tier MSOs depend less on outside capital, Karnes said. They also trade at significant discounts to expected revenue and earnings before interest, taxes, depreciation and amortization, “offering an attractive entry point for long-term investors.”
A silver lining for operators in mature markets facing slowing sales growth is that falling marijuana prices because of competition and oversupply should help the legal market compete with the illicit one, according to Jason Wilson, cannabis research and banking expert at ETF Managers Group. While that might not move the needle for share prices in 2023, it should be beneficial in the longer term, he said.
“Notwithstanding some regional bumps in the road, overall, sales across both the domestic and global markets are expected to continue to experience strong growth,” he said.
According to cannabis market research company BDSA, global legal cannabis spending will grow at a compound annual growth rate of 13.2% from 2022 to 2027, when the market size will hit $59.6 billion. The firm expects legal U.S. cannabis sales to grow 14% by the end of 2023 despite economic uncertainty and rising inflation.
According to Bruni, continued consolidation could also be a longer-term positive for the industry:
“The fragmented industry is expected to continue to merge, creating more prominent players with better economics, which should put them in a position to weather the storm until more favorable business conditions arise.”
With that being said, here are seven top marijuana stocks to consider.
Green Thumb Industries Inc. (ticker: GTBIF)
Green Thumb is an MSO that operates 77 dispensaries in 15 U.S. markets and has 18 manufacturing facilities. It is one of the few cannabis stocks that has been consistently profitable.
On Feb. 28, it reported fourth-quarter revenue of $259.3 million, an increase of 6.4% year over year, driven by the legalization of adult-use sales in New Jersey. But rising expenses, including a non-cash $88.5 million charge related to its Nevada business, caused the company to swing to a quarterly loss.
At the quarter’s end, its cash position was $178 million.
Curaleaf Holdings Inc. (CURLF)
A U.S. MSO, the company has 148 dispensaries and 29 cultivation sites in 19 states, including Arizona, Florida, Illinois, Massachusetts, New Jersey, New York and Pennsylvania.
In the third quarter, the company’s year-over-year revenue grew 7% to nearly $340 million. It ended the quarter with $198 million in cash on its balance sheet.
“We like GreenThumb Industries and Curaleaf in particular,” Karnes said. “Both have been consistent in generating cash flow sufficient to fund current operations, and each has enough cash to cover its current liabilities over the next 12 months, including any debt payments due.”
Trulieve Cannabis Corp. (TCNNF)
Trulieve Cannabis has leading market positions in Florida, Arizona and Pennsylvania. It operates dispensaries in nine states.
In the third quarter, the company’s year-over-year revenue grew 34% to $301 million. But operating expenses more than doubled, reducing its adjusted net income by 90% to $4 million.
It ended the quarter with $114 million in cash.
“U.S. cannabis has significant white space ahead, with many states yet to implement medical or adult-use programs and a growing appetite for substantive federal reform,” CEO Kim Rivers said in a press release accompanying the results.
Verano Holdings Corp. (VRNOF)
This MSO has active operations in 13 U.S. states, 14 production facilities with more than 1 million square feet of cultivation capacity, and 124 operational retail locations.
During the third quarter, the company increased its revenue to $228 million from $206 million during the same quarter in 2021 as adult-use sales in New Jersey boosted its top line.
But it widened its loss to $43 million from $13 million in the same quarter of 2021, as expenses rose and it more than doubled the amount it set aside for income taxes.
It ended the quarter with $76 million in cash.
Cresco Labs Inc. (CRLBF)
Cresco operates in 10 states and has 21 production facilities and 61 dispensaries.
The company is in the process of buying of Columbia Care Inc. (CCHWF), but on Feb. 27 it said the companies had agreed to push back the closing date of the acquisition to June 30 from March 31.
In the third quarter, the company posted revenue of $210 million, 2% lower than the prior-year quarter, as growth in emerging markets was offset by lower selling prices and other factors.
The company ended the quarter with $130 million in cash.
Cronos Group Inc. (CRON)
On the StockTwits platform, there are only two pot stocks held by popular exchange-traded fund ETFMG Alternative Harvest ETF (MJ) that have a bullish sentiment reading: SNDL Inc. (SNDL) and Cronos, according to Bruni.
“The overall sentiment of the industry skews towards a bearish outlook,” Bruni says. “We are paying attention to the weed stocks that are outliers in sentiment, which is CRON and SNDL.”
In their newsletter, the New Cannabis Venture analysts said they are “big fans” of Cronos’ stock.
Aurora Cannabis Inc. (ACB)
Internationally, Wilson expects to see continued growth in Europe, as Germany moves forward with recreational legalization, and slower growth in mature markets such as Canada.
Aurora is among a handful of companies that are well positioned to take advantage of the recreational cannabis market in Germany, where it already has a medical presence.
The company’s European division is headquartered in Berlin. In May 2022, the company announced it had received a European Union good manufacturing practice certification for a medical cannabis production facility in Germany.
