When Joe Biden assumed power in January 2021, cannabis stocks skyrocketed. The reason was hopes of federal level legalization. With 2024 being an election year, there seems to be renewed excitement related to cannabis stocks. Germany’s Federal Council recently approved the cannabis bill for personal use. This has triggered renewed interest in the sector as it finally seems that regulatory headwinds will wane.
In the United States, Kamala Harris recently urged the Drug Enforcement Administration to reclassify cannabis from “Schedule I” to “Schedule III” drug. If this happens in the coming months, it’s likely to be the first step towards federal level legalization.
I therefore believe that it’s a good time to look at some of the undervalued cannabis stocks to buy. Positive news on the regulatory front can imply 5x to 10x returns in some cannabis stocks in a matter of months.
Let’s discuss three names that look attractive for a big pre-election rally.
Tilray Brands (TLRY)
Tilray Brands (NASDAQ:TLRY) has already witnessed some price action in the recent past. In the last five trading days, TLRY stock has surged by 26%. I can say with some conviction that TLRY stock is undervalued. Positive news on the regulatory front can spark a massive rally.
My conviction is strengthened by the fact that the business outlook has improved. For Q2 2024, Tilray reported record revenue of $194 million, which was higher by 34% on a year-on-year basis. It’s encouraging to note that international cannabis net revenue increased by 55%. With legalization in Germany and a big market for medicinal cannabis in Europe, I expect robust growth to sustain.
At the same time, Tilray is now the fifth largest craft brewer in the United States. Besides the potential for steady growth in this segment, the Company has a strategic infrastructure in the country. There is a strong case for aggressive expansion on potential federal level legalization of cannabis.
Cresco Labs (CRLBF)
Cresco Labs (OTCMKTS:CRLBF) is another stock that has witnessed good momentum with a rally of 60% for year-to-date. If the news flow remains positive, I expect CRLBF stock to surge higher in the coming quarters.
Besides the possible impact of regulatory news, I am bullish on Cresco Labs considering the financial developments. For Q4 2023, the Company reported revenue of $188 million, which was lower by 2% on a year-on-year basis.
However, with focus on profitability, the numbers look good. For the quarter, Cresco reported adjusted EBITDA of $55 million. The adjusted EBITDA margin was higher by 1,400 basis points at 29%. Further, for the full year, the Company generated $59 million in operating cash flows. Clearly, financial metrics point to a sustained rally.
It’s worth noting that Cresco is among the leading players in the U.S. cannabis market. The Company has strong presence in states of Ohio, Florida, and Pennsylvania. Cresco believes that the potential opportunity in these markets is worth $2 to $4 billion in the next few years. This provides ample headroom for growth.
SNDL (SNDL)
SNDL (NASDAQ:SNDL) stock trades at an attractive forward price-earnings ratio of 23.7. I believe that a big rally is impending with the stock having remained largely sideways in the last 12 months.
As an overview, SNDL is diversified with business segments including liquor retail, cannabis retail, cannabis operations, and investments. With vertically integrated operations, the Company is well positioned to benefit as the market size swells. For 2023, SNDL reported revenue and gross profit of $909 million and $190.4 million respectively. Further, the Company ended the year with unrestricted cash of $195 million.
An interesting segment is the Company’s investment. As of Q4 2023, SNDL had $571.6 million in cash deployed in equity and debt instruments. If regulatory headwinds wane for the industry, these cannabis investments are likely to deliver significant value.
From a financial perspective, SNDL has a zero-debt balance sheet. Further, the Company reported $17.7 million in free cash flow for the second half of 2023. If FCF swells in the coming years, there will be ample financial flexibility to make strategic investments.
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.
