Cannabis growers, and the companies underwriting them, are well beyond the high times marking early state legalization. As state after state began approving medical and recreational cannabis, weed stocks skyrocketed on the prospect of investing in a new national commodity.
Then reality hit. Still federally illegal, companies faced banking difficulty, raids, and steep competition. The lattermost point was most damaging to individual companies, particularly public ones. Today, many marijuana companies are facing critical oversupply (it isn’t called weed for nothing!) and slim profit margins after accounting for security, taxation, and limited distribution network access.
Today, many favorite cannabis stocks of the late-2010s are delisted. Even those remaining are very far away from their marijuana mania market cap highs. Murky regulatory environments, steep competition, and low entry barriers for new competition make it challenging to pick quality cannabis stocks today.
If you want to add cannabis stocks to your portfolio or want a sanity check, here are the top three by market cap alongside their current industry position and overall stock quality.
Hold: Scotts Miracle-Gro (SMG)
Market cap: $2.96 billion
Most remember Scotts Miracle-Gro (NYSE:SMG) from weekend trips to your local hardware store’s gardening aisle. But consumer gardening products are only a part of SMG’s operational focus, and a major component of its model centers around cannabis cultivation.
Hawthorne Gardening, a subsidiary of SMG, targets enterprise-level cannabis growers with a suite of hydroponic equipment and similar setups. Last year, Hawthorne missed the mark badly as cannabis oversupply and dwindling consumer demand combined to hit the company with a $437.5 million annual loss.
However, Hawthorne and SMG are still in the ring and ready to pivot. Operation Springboard, a series of cost-cutting and margin-improving measures executives implemented last year, is well on its way to turning SMG and its Hawthorne segment back into a money machine. The company’s most recent filing indicated Springboard’s already saved $100 million, with more on the way. Company-wide, income and profit are back on the table as the quarter turned a $43.7 million profit. That isn’t great, certainly, but a far cry better than the previous year’s net $443.9 million annual loss.
Frankly, Hawthorne will continue lagging SMG’s other sales segments until national cannabis markets return. In the meantime, though, SMG itself is a resounding HOLD.
The company’s at a five-year low, but management is slowly turning the ship towards profitability through a renewed focus on core segments and creating efficiencies within their cannabis sector. The stock also generates a 3.75% dividend yield to tide investors over while they wait for a cannabis rebound. If you haven’t yet bought into SMG, though, now isn’t the time to do so.
Buy: Tilray Brands (TLRY)
Market cap: $1.84 billion
Tilray Brands (NASDAQ: TLRY) is one of the few major cannabis stocks that emerged from the post-2019 bloodbath intact. This week the company cemented its place within the US market after announcing it bought eight craft beer businesses from beverage giant Anheuser-Busch (NYSE:BUD). After the deal closes, this addition to their sales portfolio will make Tilray the fifth largest craft brewer in the U.S. in a market where craft beer is booming.
Diversification away from core business models isn’t usually recommended, but for an industry as competitive and fundamentally questionable as cannabis, buying into a peripheral market is one of the smartest moves Tilray can make.
Tilray’s no stranger to M&A and its past Aphria acquisition proves the viability of buying competitors or companies in related sectors. The strategy comes with a cost, though. Although the craft beer buy price isn’t published, it likely wasn’t cheap and Tilray’s financials aren’t ideal as this year marks a net $178.2 million loss. Still, the company is cleaning up its balance sheet and reducing debt year-over-year.
Ultimately, Tilray is a more speculative investment than SMG, but one I’m confident is a viable play. Diversification into new sectors and a portfolio that includes fan favorites like SweetWater Brewing and Shock Top will help drive revenue into Tilray’s coffers. Even if its cannabis segment doesn’t bounce back, there’s little risk of total dissolution.
If nothing else, the company’s crazy 0.54 price-to-book ratio should make investors take notice and BUY Tilray. If nothing else, that valuation makes a viable value play.
Sell: Curaleaf Holdings (CURLF)
Market cap: $2.6 billion
The previous two stocks on my radar have one commonality: diversified business interests and an existing, peripheral series of revenue streams with baked-in distribution networks and consumer awareness. Curaleaf Holdings (OTCMKTS: CURLF) lags on both.
Curaleaf continues to be dramatically unprofitable with income dropping 8% in 2023 to hit a net $398.05 million loss on the year. The company’s short-term financial viability is in question, too. Curaleaf eats cash as fast as it can raise it, and its current $131 million annual burn rate may quickly outpace its $161 million cash balance.
We’ve covered weed market shakiness and the benefits of diversifying, but Curaleaf defies expectations in this regard. Instead of expanding horizons, Curaleaf is doubling down on cannabis. Although a 2022 acquisition of former competitor Tryke Companies expanded its footprint to include 144 new dispensary sites and 29 new grow ops, pricey buyouts like this don’t deflect from critical market failings.
Ultimately, as a pure-play cannabis stock, Curaleaf might be the way to go. But in today’s climate, considering both economic factors and federal illegality keeping legacy beverage and tobacco companies away, Curaleaf is a hard SELL.
On the date of publication, Jeremy Flint held no positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
