In the last five years, cannabis stocks have gone through small phases of euphoria that has been followed by a deep correction. There are two major challenges that have kept cannabis stocks depressed. First, regulatory headwinds have impacted growth. Further, cannabis companies have suffered from over capacity and cash burn.
It finally seems that there is light at the end of the tunnel. Regulatory headwinds have been gradually waning. Germany recently legalized cannabis and other European countries are likely to follow suit. Further, cannabis is on-track to be reclassified as a Schedule III drug in the U.S. I must add that the medicinal cannabis market is getting bigger in Europe.
Specific to companies, there has been a significant change. Some of the best cannabis players have shifted towards cost cutting and focused on profitability. Several companies have achieved EBITDA level break-even and many others are likely to achieve EBITDA level profitability in the coming quarters.
Therefore, we have positive industry tailwinds coupled with improving fundamentals for companies. This is likely to translate into multibagger returns for some of the best cannabis stocks in the next five years. This column discusses seven ideas that are worth considering.
Cronos Group (CRON)
Cronos Group (NASDAQ:CRON) is possibly among the most undervalued cannabis stocks. The current market valuation of the company at $866 million is almost equal to the cash buffer of $855 million as of Q1 2024. The undervaluation coupled with positive business developments makes me believe that CRON stock is poised for multibagger returns.
A key positive is that Cronos will utilize its cash buffer to make organic investments and potential acquisitions. This will support likely growth acceleration in the coming years. It’s worth noting that Cronos was initially focused on Israel and Canada. However, in the last three quarters, the company has made inroads into Germany, Australia, and the United Kingdom. Geographical expansion is one factor that’s likely to support growth.
Recently, Cronos announced a $51 million secured non-revolving credit facility to GrowCo to fund facility expansion. The objective of the expansion is to cater to the increased global market demand for high-quality cannabis flower.
As revenue growth accelerates, I expect operating leverage to translate into EBITDA margin expansion. Cronos has already guided for positive net change in cash for 2024.
Curaleaf Holdings (CURLF)
Curaleaf Holdings (OTCMKTS:CURLF) stock has trended higher by almost 20% in the last 12 months. The stock however seems attractively valued considering the point that the cannabis company is poised for accelerated growth.
It’s worth noting that Curaleaf has presence in 17 states in the U.S. With the possible reclassification of cannabis as a Schedule III drug, the company is positioned to benefit. With the upcoming Presidential elections, the federal level legalization is also likely to be in focus.
At the same time, Curaleaf is pursuing aggressive expansion in Europe. In March, the company acquired Northern Green Canada. The latter is a vertically integrated Canadian licensed cannabis producer with EU-GMP certification. Besides making inroads in Europe, the acquisition will also help Curaleaf establish presence in Australia and New Zealand. Further, in February, Curaleaf acquired Can4Med, a pharmaceutical wholesaler specializing in cannabinoid medications in Poland.
Therefore, organic and acquisition driven growth will help Curaleaf in boosting market share in Europe. It’s worth noting that the company has already been reporting positive operating and free cash flows. As growth accelerates, financial flexibility will improve and allow Curaleaf to make bigger investments.
Tilray Brands (TLRY)
Tilray Brands (NASDAQ:TLRY) stock has remained subdued in the last 12 months. I see this as a good opportunity to accumulate this undervalued stock. If regulatory outcomes remain positive, 5x to 10x returns are likely in relatively quick time.
In May, Tilray announced a $250 million at-the-market offering. The objective of the fund raise is to pursue organic or acquisition driven growth in the U.S. when cannabis is reclassified as a Schedule III drug. The reclassification is therefore an important catalyst for TLRY stock in the foreseeable future.
Another point to note is that for Q3 2024, Tilray reported cannabis revenue growth of 33% on a year-on-year basis. However, international cannabis revenue growth was 44% on the back of traction in the medicinal cannabis business. Last month, Tilray launched the Broken Coast medicinal cannabis brand in Australia. With inroads into new geographies, it’s likely that international revenue growth will remain robust.
I must add that Tilray has a diversified business. Currently, the company is the fifth largest craft beer brewer in the U.S. The cannabis company has also launched a new brand of non-alcoholic brews. The alcohol and beverages business will support top-line growth.
Canopy Growth (CGC)
In mid-March, Canopy Growth (NASDAQ:CGC) stock was trading at $2.8. The stock however went ballistic and touched $15 by the end of April. A key reason was that Canopy Growth has strong presence in Germany where cannabis was legalized for adult use.
However, CGC stock has corrected to $6.5 on profit booking. Another reason for the correction is a $250 million equity offering that implied dilution. I see current levels as attractive for long term exposure.
In terms of renewed stock upside catalysts, I believe that there are two factors to note. First, Canopy Growth has significantly reduced EBITDA level losses for financial year 2024. It’s likely that the company will achieve EBITDA break-even in the next 12 months. CGC stock is likely to trend higher on this event.
Further, Canopy Growth has been expanding international presence. In the U.S. the company has presence in 23 states. While federal level legalization remains elusive, 39 states have legalized cannabis for medicinal use. Additionally, recreational cannabis is legalized in 24 states. Reclassification of cannabis as a Schedule III drug is an important growth catalyst.
Aurora Cannabis (ACB)
Aurora Cannabis (NASDAQ:ACB) is another undervalued cannabis stock to buy before it skyrockets. Amidst volatility, the stock has remained sideways in the last six months and I expect a big breakout on the upside in the coming quarters.
Recently, Aurora reported the six consecutive quarter of positive adjusted EBITDA. The company has also reaffirmed its guidance for achieving positive free cash flow by the end of the year. Additionally, with the cannabis business being debt-free and a cash buffer of $180 million provides Aurora with high financial flexibility.
It’s worth noting that Aurora already has strong presence in Canada. The company is therefore looking at international markets for growth acceleration. For FY2024, global cannabis net revenue increased by 20% on a year-on-year basis. The company expects Australia and the European markets to drive growth in the coming years. The acquisition of MedReleaf Australia is likely to support growth acceleration in the current financial year.
Trulieve Cannabis (TCNNF)
Trulieve Cannabis (OTCMKTS:TCNNF) stock has surged by 120% in the last 12 months. The stock however remains attractive and I consider the current consolidation as a good buying opportunity.
As an overview, Trulieve is a vertically integrated multi-stage cannabis operator. As of December 2023, the company had more than four million square feet of cultivation and processing capacity. Further, as of June, Trulieve had 200 retail dispensaries. Therefore, the company has strong presence in the U.S. and is positioned to benefit from an impending reclassification of cannabis as a Schedule III drug.
For Q1 2024, the company reported revenue and EBITDA of $298 million and $85 million respectively. Further, free cash flow for the quarter was $124 million. This provides Trulieve with high financial flexibility for organic and acquisition driven growth.
I must add that the company has presence exclusively in the U.S. While the addressable market is big in the country, there is a likelihood of expansion in Europe where the medicinal cannabis market is gaining traction. This is a potential catalyst for growth acceleration.
SNDL (SNDL)
SNDL (NASDAQ:SNDL) is another interesting cannabis company with the stock looking attractive at a forward P/E of 17.9. Of course, it’s a high-risk bet. However, if the company’s investments deliver value, multibagger returns are likely in quick time.
For Q1 2024, SNDL reported liquor retail revenue of $116.1 million, which was flat on a year-on-year (YOY) basis. However, cannabis retail business growth was 6% on a YOY basis to $71.3 million. Another segment, cannabis operations, delivered healthy YOY growth of 17%.
It’s important to note that the business is well diversified and gross margin was healthy at 25% for Q1. Another important point to note is that SNDL reported cash, marketable securities, and investments of $783.2 million as of Q1.
Therefore, financial flexibility is high for aggressive investments. At the same time, SNDL has guided for positive free cash flows in 2024. It’s likely that FCF will accelerate in the next few years and boost the company’s capability to make 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.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
