Cannabis stocks have gained ground over the past two weeks following news that U.S. regulators may reclassify marijuana as a Schedule III drug, down from its more highly regulated Schedule I status. A possible rescheduling would still mean cannabis remains a controlled substance, but it would give licensed producers much more leeway to expand into other markets, conduct research, access traditional funding sources and benefit from more favorable tax structures, thereby fueling the growth of the industry.
Since the rescheduling announcement in late August, shares of Canopy Growth (CGC) have nearly tripled, valuing the Canadian cannabis stock at a market cap of $988 million. Despite the recent share price rise, CGC is still down 98% from its all-time highs, having wiped out significant investor wealth over the past five years.
And analysts don’t seem to like CGC’s prospects for further upside. The consensus rating among 12 analysts is “hold,” and the average price target of $1.10 represents a 4% discount to the stock’s current levels.
Canadian marijuana producers in particular are grappling with a multitude of industry-wide issues. First, the slow rollout of retail stores in Canada has led to increased production volumes. Licensed producers have also been hit by cannibalization of the illegal market and increasing competition, leading to an oversupply of marijuana.
This has led to increased inventory levels and decreased profit margins. In fact, over the last four fiscal years, Canopy Growth has recorded cumulative operating losses of almost $3 billion. Canopy Growth’s fundamentals remain weak, making it a relatively risky investment today.
Here are three cannabis stocks that have higher upside potential than Canopy Growth, according to Wall Street.
Green thumb industries
The financial situation of cannabis producers in the United States is much better than that of their Canadian counterparts. One such company is Chicago-based Green Thumb Industries (GTBIF), which has a market cap of $2.82 billion. The multistate operator ended 2022 with $1.01 billion in revenue.
In the second quarter of 2023, the marijuana company reported GAAP net income for the 11th consecutive quarter. It invested $240 million in capital expenditures over the past 12 months and opened six new retail stores in the June quarter. Its adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $152 million, a margin of 30%.
Additionally, Green Thumb announced a $50 million stock buyback plan earlier this month.
Of the 12 analysts covering GTBIF, nine recommend a “strong buy,” two recommend a “moderate buy,” and one recommend “hold.” The average price target for Green Thumb stock is $15.42, implying an expected upside of over 38% from current levels.
Massachusetts-based multistate operator Curaleaf (CURLF) is valued at a market cap of $3.38 billion. With over 150 retail stores, Curaleaf has a presence in 19 states, giving it a decent presence in the United States.
In the second quarter of 2023, Curaleaf reported revenue of $339 million, an increase of 4% year-over-year. Although sales growth has slowed in recent quarters, the company is focused on expanding into international markets, such as Europe.
In fact, at the end of 2022, Curaleaf acquired a 55% stake in Germany’s largest medical marijuana company. With Germany moves towards legalization and marijuana sales in Europe are expected exceed $8.5 billion this year, the company has the opportunity to expand its revenue base.
Of the 12 analysts covering Curaleaf stock, eight recommend a “strong buy”, a “moderate buy”, two recommend “hold” and one recommend “strong sell”. The average price target for CURLF is $5.53, 10% above current prices.
The last cannabis stock on my list is Cronos (CRON), which is valued at $910 million by market cap. Due to a challenging macroeconomic environment, Cronos has focused on reducing its cost base and improving its profit margins.
Earlier this year, Kronos left CBD operations in the United States. focus on the recreational marijuana segment. The company also announced its intention to leaving a facility in Manitoba by the end of this year and plans to reduce operating expenses by between $20 million and $25 million in 2023.
With $841 million in liquidity, Cronos is well-positioned to sustain its high burn rates and become profitable in the future by focusing on higher-margin products.
Of the 11 analysts who follow CRON, three have a “strong buy” recommendation, seven recommend a “hold” and one recommends a “moderate sell.” The stock’s average price target is $2.76, 22% higher than current levels.
As of the date of publication, Aditya Raghunath had (directly or indirectly) no position in any of the securities mentioned in this article. All information and data contained in this article are for informational purposes only. For more information, please see Barchart’s disclosure policy here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.