Analyst Sonny Randhawa of Seaport Global Securities launched coverage on an array of Cannabis stocks as he believes a substitute scenario could unfold. He assigned Buy ratings to the following cannabis stocks – AAWH, CURLF, and GTBIF – which I am also bullish on. According to Randhawa: “With budgets constrained, we believe new customer penetration rates could accelerate as consumers spend more time at home and the bang-per-buck for cannabis vs alcohol keeps moving higher.”
Don't Miss our Black Friday Offers:
- Unlock your investing potential with TipRanks Premium - Now At 40% OFF!
- Make smarter investments with weekly expert stock picks from the Smart Investor Newsletter
In the past three months, Randhawa’s ratings have achieved a 10.5% return on average, giving his ratings extra importance.
The analyst’s base case is that cannabis is treated as a substitute product for alcohol and that price elasticity could enter the fray. Randhawa’s take is interesting, and it seems reasonable. However, I have a few additional features to add to the debate.
Analyzing the Cannabis Industry as a Whole
The cannabis industry is forecasted to grow at a CAGR (compound annual growth rate) of 32.04% until 2028, with a few key players assumably raking in most of the profits. Randhawa mentions that MSOs (multi-state operators) could be the key beneficiaries of the industry due to their ability to better deflect the incremental legal “noise” from Washington.
Furthermore, many cannabis companies possess vertically integrated business models, even at an early stage of their business cycle. This is exceptionally rare as most industries only see their constituent companies traverse into vertical integration at mature stages.
Vertical integration provides high cost and pricing benefits; as such, cannabis companies will likely reach impressive profit margins early in their business cycles.
Ascend Wellness Holdings (AAWH)
Ascend Wellness Holdings engages in the cultivation, manufacturing, and distribution of cannabis consumer goods. The firm blossomed in 2021, achieving a revenue growth rate of 87.6%.
Recently, the company secured an additional $36.5 million in credit, which will be utilized for its internal growth.
Ascend Wellness CFO, Dan Neville opined the following: “This financing will support our investments in near-term growth initiatives, including the expansion of our Pennsylvania assets and the acquisition of MedMen NY. We continue to explore all financing options, including additional capacity under the term loan increase option.”
The entity’s footprint currently spans more than twenty dispensaries in five states, eight retail facilities, and a single cultivation facility. Moreover, the firm’s early-stage expansion clearly isn’t priced by the market, as the stock’s forward enterprise-value-to-EBITDA ratio is at a 48.3% discount compared to the sector average.
Ascend Wellness is a highly volatile stock. However, with the correct timing, investors could benefit immensely by investing in the stock.
Turning to Wall Street, Ascend Wellness earns a Strong Buy consensus rating based on three Buys. Ascend Wellness’ average price target of $8.67 implies 248.2% upside potential.
Curaleaf Holdings (CURLF) (TSE: CURA)
Curaleaf is well placed in the cannabis value chain. The company’s vertically integrated “Growth to Consumer” segment is accompanied by a Services segment that assists new market entrants with value-added professional services.
Therefore, Curaleaf is one of the more established players in the industry, which is conveyed by its three-year revenue CAGR of 130%. Also, Curaleaf has a gross profit margin of 57.5%, suggesting that the company has achieved economies of scale, allowing it to possess pricing power.
Overall, Curaleaf can be considered a growth stock, as its trades at a 2.2x surplus to its book value and 3.1x higher than its sales. However, with the firm’s year-over-year EBITDA and operating cash flow growing at 73.2% and 268%, respectively, Curaleaf’s investors might hold off on any transcendent valuation concerns.
Turning to Wall Street, Cureleaf earns a Strong Buy consensus rating based on eight Buys and one Hold. Curaleaf’s average price target of $11.55 implies 107.3% upside potential.
Green Thumb Industries (GTBIF) (TSE: GTII)
Green Thumb is another participant in the packaged medical marijuana business. The company’s three-year revenue CAGR of 128% speaks volumes in terms of market share growth, and its three-year CAGR of 92.5% in earnings from continuing operations indicates that the firm runs a sustainable business model.
Green Thumb recently added two new recreational stores to its portfolio. The stores are located in New Jersey and were approved for operations on April 21st. The company’s 241.4% year-over-year capital expenditure growth suggests that rapid operational expansion might be a recurring phenomenon in Green Thumb’s case.
Furthermore, the firm’s financials remain robust. Green Thumb achieved $242.6 million in revenue in its previous quarter, a 25% year-over-year growth rate. More impressively, the company’s net income rose 179% year-over-year, increasing shareholder value by 12 cents per share.
Valuation metrics also look good. The stock’s price-to-sales ratio is 85.5% less than its five-year average, leaving a reasonable bias that the stock is undervalued.
Turning to Wall Street, Green Thumb earns a Strong Buy consensus rating based on 10 unanimous Buy ratings assigned in the past three months. Green Thumb’s average price target of $31.08 implies 224.4% upside potential.
Conclusion: Cannabis Stocks Could be Great Investments Currently
After the AdvisorShares Pure US Cannabis ETF’s (MSOS) more than 50% year-to-date downturn, it’s trivial that many cannabis stocks might be at investable price levels. Seaport Global’s Sonny Randhawa believes that various circumstances could lead to a cannabis bull market. Therefore, factoring in industry-specific and market-based events, cannabis stocks could be some of the best investments on the market.
The stocks mentioned in this article were all upgraded by Randhawa and are “best-in-class” assets, in my opinion.
