Without a doubt, the best time to buy stocks in a sector is when sentiments are significantly bearish. Or as the saying goes: “buy when there is fear in the streets and sell when there is greed.” This perfectly applies to the cannabis sector today. In fact, some of the best cannabis stocks have plunged and trade at a deep valuation gap.
I understand that there are concerns on the regulatory front. Furthermore, I understand that competition has intensified and some cannabis companies continue to burn cash. Even with these facts, the sector looks attractive.
Encouragingly, the cannabis market is growing in the United States even without federal-level legalization. More than 50% of states have legalized cannabis. In fact, the market is forecasted to be worth $71 billion by 2030 without legalization. And of course, the European market has big potential in the recreational as well as medicinal cannabis segment.
I believe the concerns are therefore overdone, and I would look to buy some quality cannabis stocks for robust returns. Let’s look at three together.
Curaleaf Holdings (CURLF)
Curaleaf Holdings (OTCMKTS:CURLF) is among my top picks for the potential multibagger stocks within the cannabis sector. It’s worth noting that for year-to-date (YTD), CURLF stock has declined by 12%. The stock seems resilient at oversold levels, and I expect a breakout on the upside.
It’s worth noting that Curaleaf has not reported stellar revenue growth. For Q3 2023, revenue increased by 2% on a year-on-year (YoY) basis to $333 million. However, the big positive is an adjusted EBITDA of $75 million and operating cash flows of $47 million.
Encouragingly, the company has indicated “a strong end to 2023 and an exciting 2024.” And with their expanding presence in Europe, there is a strong case for growth acceleration.
I also like the fact that Curaleaf has a strong presence in the U.S. With a focus on research and development, the company is likely to create value without federal-level legalization. This is a surefire pick for my list.
Tilray Brands (TLRY)
Tilray Brands (NASDAQ:TLRY) is another stock that I would hold for multibagger returns in the next few years. While the stock has corrected by 50% in the last 12 months, I believe that positive business developments in 2024 will be a catalyst for stock upside.
Through multiple acquisitions, Tilray has established itself as the fifth largest craft brewer in the United States. And the craft beer market is expected to grow at a CAGR of 7.2% through 2030. The diversification is likely to support growth and create value. Furthermore, the company has a strong strategic infrastructure in the U.S. and can expand aggressively in a federal level cannabis legalization scenario.
The good news is that Tilray has reported international cannabis revenue growth of 37% on a YoY basis for Q1 2024. Led by a strong presence in Canada, the company’s international sales seem to be gaining traction.
Tilray has also guided for positive adjusted free cash flow for the 2024 financial year. As financial metrics improve coupled with growth acceleration, TLRY stock is likely to surge higher from undervalued levels.
Cronos Group (CRON)
Cronos Group (NASDAQ:CRON) is an undervalued cannabis stock that’s I think is likely to breakout on the upside. In the last six months, CRON stock has trended higher by 16%. I expect this positive momentum to sustain backed by fundamentals.
An obvious positive is the fact that Cronos has $840 million in cash and equivalents. For context, that’s more than the company’s market valuation. In a federal level legalization scenario, Cronos will have flexibility to aggressively pursue organic and acquisition driven growth. For now, Cronos seems to be holding back its resources and is in a wait-and-watch mode.
Another positive from a financial perspective is that Cronos expects net change in cash to be positive in 2024. With respect to cost cutting, the company has been successful in improving key margins. Once growth accelerates, operating leverage will drive significant EBITDA margin expansion. I must add that the Company’s focus on research driven medicinal cannabis products is likely to create value in the next five years.
On the date of publication, Faisal Humayun did not hold (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.
