If we look at the historic price action for top cannabis stocks, the extreme euphoria peaked in the second half of 2018. That’s when the markets began to realize the growth inflection point might still be few years away.
What followed was an extended period of pain for cannabis stocks. For companies in the sector, growth was much lower than anticipated and cash burn increased. Barring trading opportunities, long-term investors have been deep in the red on their exposure to cannabis stocks.
However, after an extended period of downside, there finally seems to be some hope. First and foremost, most of the top cannabis stocks have discounted the concerns of slow growth and cash burn.
Furthermore, there seems to be hopes that federal-level legalization of cannabis in the United States will be a gamechanger. So far, state-level legalization of recreational cannabis has already gained traction. Overall, more than 145 million residents in 18 states have access to legalized marijuana.
In addition to this, the market for medicinal cannabis has been growing in Europe and Israel. With marijuana companies pursuing evidence-backed clinical trials for medicinal uses, the long-term outlook seems bright.
Given these factors, it might be a good time to consider exposure to some top cannabis stocks. I will not be surprised if these picks double in the next 12 to 18 months on a conservative basis.
Tilray (NASDAQ:TLRY) stock has slumped by nearly 75% in the last 12 months. It finally seems the worst of the correction is over.
Recently, CEO Irwin Simon predicted the company will have $1.5 billion in sales in the U.S. after federal-level legalization. The CEO also expects legalization in Europe in 2023. If these predictions hold true, sales growth is at an inflection point.
It’s worth mentioning Tilray has already guided for revenue of $4 billion by 2024. This would position it for robust growth in the next few years. For the third quarter of 2022, Tilray reported revenue increased 23% to $152 million. The company has also been reporting positive adjusted EBITDA on a sustained basis.
In addition to these positive catalysts, the company already has a leading market share in medicinal cannabis in Europe. Tilray believes this market is likely to be worth $3.9 billion by 2025. As the market size swells and Tilray pursues clinical trials, the outlook is positive.
In the United States, the company has a presence through Manitoba Harvest. The latter is a seller of branded hemp-based food products. Tilray also acquired SweetWater, which is likely to help it build a presence in the cannabis beverage segment.
Overall, TLRY stock looks attractive based on its growth outlook. I would consider some exposure at current levels.
Cronos (NASDAQ:CRON) stock has also been battered and trades near all-time lows. At its current price, I would be willing to take a small contrarian bet.
Even with CRON stock sliding, the company’s top line has been encouraging. For 2021, Cronos reported revenue growth of 59% on a year-over-year (YOY) basis to $74.4 million. Another point to note is the company ended last year with $887 million in cash and $118 million in short-term investments. This provides ample financial flexibility.
However, the concern for Cronos is cash burn. While Tilray continues to report positive adjusted EBITDA, Cronos is still at an EBITDA-level loss. As a matter of fact, the company’s adjusted EBITDA losses expanded in 2021 on a YOY basis. This explains the price action.
Even with the cash burn, I believe Cronos is undervalued — especially with impending legalization in parts of Europe and possibly the U.S.
With operating leverage, Cronos is likely to turn profitable. Also, the company has been focused on cost cutting in the recent past. Cronos announced it will exit its Peace Naturals Campus in Canada. The objective is to close segments that are not gaining traction.
Cronos is also backed by Altria (NYSE:MO), which has a core business that’s a cash cow. Funding growth is unlikely to be a challenge when markets open up after legalization.
On a relative basis, Cresco Labs (OTCMKTS:CRLBF) has outperformed both TLRY and CRON stocks.
Cresco claims to be the leading wholesaler of branded cannabis products in the U.S. One reason to be bullish on CRLBF stock is the company’s growth trajectory. For 2021, Cresco reported revenue of $822 million, which was higher by 73% on a YOY basis. For the same period, the company reported 219% growth in adjusted EBITDA to $194 million.
From the perspective of financial flexibility, Cresco reported cash and equivalents of $224 million. Additionally, the company reported operating cash flow (OCF) of $38 million for Q4 2021. In the current year, the OCF visibility is likely to be in excess of $200 million considering the organic and inorganic growth.
Another reasons to be bullish on Cresco is the company aggressive inorganic growth strategy. Last month, Cresco announced the acquisition of Columbia Care.
Columbia is a manufacturer and provider of cannabis products and related services, with licenses in 18 U.S. jurisdictions and the European Union (EU). The acquisition would imply a pro-forma revenue of $1.4 billion for Cresco Labs.
Overall, CRLBF stock looks attractive and among the top cannabis stocks to buy. The cannabis wholesaler seems positioned to gain a leading market share in several states in the U.S.
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