With cannabis usage continuing to rise, now could be an opportune time to invest in marijuana stocks. Over 52 million Americans currently use cannabis, and legalization seems inevitable as more states approve recreational and medical use. However, investing in cannabis stocks is extremely risky and highly speculative. I’d recommend taking only a small position in most names, as the regulatory environment remains uncertain. Though public opinion has shifted, full federal legalization in the U.S. could still be a far way off.
The government has many higher priorities, and cannabis is already effectively decriminalized in many places. We may have to stick to investing primarily in Canadian stocks, as the U.S market may take time to get on board in terms of regulation. Still, for investors with the tolerance for higher-risk options, a few cannabis stocks offer intriguing upside if legalization talk does accelerate. The top players could deliver massive returns if the regulatory climate improves faster than many currently expect. Of course, valuations in this sector already reflect some legalization hopes, so I’d remain cautious.
Let’s look at some of the cannabis stocks that could pop in the coming months.
Curaleaf (CURLF)
Of the cannabis stocks with big upside potential, Curaleaf (OTCMKTS:CURLF) stands out as my top pick. A U.S.-based multi-state operator focused on medical and recreational cannabis, Curaleaf enjoys a home-field advantage in the largest addressable cannabis market in the world. Though U.S. federal legalization could take time, Curaleaf is strategically-positioned in key states that have already legalized cannabis and are primed for massive growth.
Curaleaf currently operates over 150 dispensaries across 18 states, along with over 21 cultivation sites. This extensive footprint provides tremendous scale and vertical integration advantages as more states legalize. In fact, Curaleaf is the largest cannabis operator by revenue, on track to generate over $1.3 billion in sales for 2023.
Despite economic headwinds, Curaleaf has continued to expand, even with modest margins. Notably, Q2 2023 revenue is up 0.3% year-over-year. Gross margins also improved to 44%, and the company generated positive free cash flow, reflecting its strong execution. As new markets like New Jersey and New York ramp up, Curaleaf could see exponential growth ahead.
Though not without risks if legalization expectations stall, Curaleaf appears poised to capitalize on the U.S. cannabis boom. With analysts forecasting over 42% upside to $6.24, Curaleaf offers massive potential for patient, long-term investors. This home-grown cannabis juggernaut remains my top pick in this space.
Canopy Growth (CGC)
While I may not be as bullish on this cannabis pick, I still see potential for Canada’s Canopy Growth (NASDAQ:CGC). As the largest licensed producer in Canada, Canopy enjoys strong brand recognition and distribution advantages in the legal Canadian adult-use market. The company is also making strategic moves to capitalize on U.S. opportunities once federal restrictions ease.
However, Canopy has struggled with profitability, posting steep losses in recent quarters. Revenue beat expectations by $13.7 million in its fiscal Q1 2024. Supply chain and production costs also remain high as Canopy right-sizes its operations. With its large cash pile dwindling, Canopy needs improved execution to achieve profitability and avoid tapping the debt or equity markets.
Nonetheless, Canopy’s recent entry into the U.S. cannabis market via its acquisition of Jetty Extracts could pay off handsomely if federal legalization materializes. The company is also poised to capitalize on cannabis reform with its Acreage Holdings acquisition, once restrictions loosen. That said, near-term challenges make Canopy a higher-risk cannabis play.
Though Wall Street price targets lag Canopy’s recent uptrend and the recent rescheduling buzz, its advantage as a “first mover” in Canada bodes well for long-term investors.
IM Cannabis (IMCC)
As a small-cap cannabis stock trading at just 85 cents per share, IM Cannabis (NASDAQ:IMCC) offers massive upside potential if its execution improves. This Israel-based medical cannabis operator produces premium strains domestically, while distributing brands globally through its EU-GMP German facility.
Despite revenue declining 47% year-over-year in Q2 2023, early indicators suggest IM Cannabis’ strategic refocusing on core markets are moving the needle in the right direction. Sales are now expected to decline 1.6% for the full year, but then turn around and grow by 22% next year. Gross margins expanded to 28% from 20% last year, reflecting reduced production costs and higher-margin medical product sales.
With a lean, low-cost operating structure now in place, the company targets break-even EBITDA profitability soon. However, Israeli cannabis oversupply and stalled patient growth remain headwinds for now. Still, pending Israeli legalization reforms could significantly expand the addressable patient population long-term.
Meanwhile, IM Cannabis continues gaining footholds in key markets. Of note, the company has made inroads into Germany’s rapidly-growing medical market. Offering distribution and EU-GMP certification services to peers also provides incremental revenue. If demand accelerates as expected, IM Cannabis’ production assets and distribution reach position it well to capitalize on the European cannabis boom.
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On the date of publication, Omor Ibne Ehsan did not have (either directly or indirectly) any 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.
