Over the last few years, cannabis stocks have struggled and trended lower. The two negatives being regulatory headwinds and cash burn. However, there finally seems to be light at the end of the tunnel. Companies have controlled costs and this has translated into improved margins. Further, it’s likely that regulatory headwinds will wane for the sector. Given the sense of optimism, this column discusses the most undervalued cannabis stocks to buy in April.
It’s worth noting that Germany recently legalized the use of cannabis. Further, there are calls for rescheduling of cannabis from Schedule I to Schedule III drug in the United States. Since it’s an election year, I also expect clarity on the possibility of federal level legalization.
Having said that, the market is significant even if there is no legalization at the federal level. The U.S. cannabis market is expected to be worth $71 billion by 2030. Further, the European medicinal cannabis market is expected to grow at a CAGR of 22.5% through 2030.
With ample headroom for growth, let’s talk about the undervalued cannabis stocks that can be massive value creators.
Cronos (CRON)
Cronos (NASDAQ:CRON) stock has finally found takers at oversold levels. In the last one month, CRON stock has trended higher by 31%. For a company with a cash buffer of $862 million, the current market valuation of $1 billion looks deeply undervalued.
Of course, the cash buffer is not the only reason to be bullish. It does provide ample dry gunpower for organic and acquisition driven growth. However, the company’s business developments have also been positive.
In 2023, Cronos expanded its product portfolio in existing markets of Israel and Canada. At the same time, the company has entered new markets of Germany and Australia. In both these markets, Cronos is focused on the medicinal cannabis business. With the legalization of cannabis in Germany, the company has scope for aggressive expansion in the medicinal and recreational segment.
Given the cash buffer, it’s also likely that Cronos will exposure entry into other countries in Europe. As the serviceable addressable market swells, I expect revenue growth to accelerate. Over the next few years, CRON stock is likely to deliver multibagger returns.
Tilray Brands (TLRY)
Tilray Brands (NASDAQ:TLRY) is another stock that has stabilized after a big correction in the last few years. In the last 12 months, TLRY stock has remained sideways. I expect a big breakout on the upside after this period of consolidation.
In 2023, Tilray focused on acquisitions for diversification. The company has positioned itself as the fifth largest craft beer brewer in the U.S. Presence in the U.S. also serves as a strategic infrastructure for expansion of the cannabis business on potential federal level legalization.
However, even without legalization, the company’s cannabis business has witnessed healthy growth. For Q2 2024, Tilray reported 31% year-on-year growth in net cannabis revenue from Canada. For the same period, international cannabis revenue growth was 55%. This was fuelled by the medicinal cannabis business.
On the financial front, Tilray has guided for positive adjusted free cash flow for the current financial year. With healthy growth, I expect FCF to accelerate in the coming years. This will provide flexibility for expansion and investment in research driven medicinal cannabis business.
Curaleaf Holdings (CURLF)
Curaleaf Holdings (OTCMKTS:CURLF) has been among the best performing cannabis stocks with an upside of 81% in the last 12 months. In my view, this is just the beginning of the rally with the management expecting 2024 to be a “catalyst year” for growth.
It’s worth noting that Curaleaf has strong presence in the U.S. with operations in 17 states. Further, the company is boosting presence in Europe through the organic route and acquisitions. The company has leadership position in the UK medicinal cannabis market. Other markets where Curaleaf has established presence includes Germany, Switzerland, Italy, Portugal, and Poland.
Another positive to note is that Curaleaf reported operating cash flow of $91 million for 2023. For Q4 2023, Curaleaf reported EBITDA margin of 24%, which was higher by 490 basis points on a year-on-year basis. With aggressive expansion and launch of new products, I expect EBITDA margin to remain in an uptrend. Cash flows are therefore likely to swell in the next five years. With research and development driven growth, CURLF stock promises to be a long-term value creator. If you are looking for undervalued cannabis stocks, start here.
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.
