The cannabis industry has been overlooked by investors for a while now. But while cannabis stocks continue to struggle, the industry is rapidly growing. Cannabis is increasingly being legalized for medicinal and/or recreational purposes around the world. Recently, Germany eased regulations related to recreational marijuana possession and use.
This week has been favorable for cannabis stocks, too, after Marijuana Moment shared Vice President Kamala Harris’ positive comments on Monday. At a White House meeting, Harris stated that the Drug Enforcement Administration (DEA) should reschedule marijuana “as quickly as possible.”
Currently, marijuana is deemed a Schedule 1 drug under the Controlled Substances Act. Harris believes it is "absurd" and "patently unfair" to classify cannabis alongside drugs such as heroin.
While reclassification will undoubtedly benefit cannabis companies, the process could take some time. Until then, there are a few cannabis companies that can weather the tough times and potentially win big in the long run. Let's look at the two best cannabis stocks to buy now.
Growth Stock No. 1: Tilray Brands
The first growth stock on my list is Canadian marijuana operator Tilray Brands (TLRY). Tilray Brands was formed when cannabis company Aphria acquired Tilray in 2021, and now operates under the leadership of Aphria’s ex-CEO, Irwin Simon.
Tilray stock is down 14.6% year-to-date, compared to the S&P 500 Index’s ($SPX) gain of 9.9%.
While cannabis is legal in Canada, the market is small and competitive, making it difficult for Canadian producers to increase revenue. Tilray, on the other hand, made a wise decision to diversify its product portfolio beyond cannabis to include wellness foods and snacks, as well as craft beverages, while expanding globally to 20 countries.
This is likely to have contributed to the 34% year-over-year increase in revenue to $194 million in the company's most recent second quarter of fiscal 2024.
While cannabis revenue increased 35% year-over-year to $67 million, the company earned $47 million from its beverage alcohol business in the U.S. Furthermore, the company's German subsidiary, CC Pharma, generates a significant amount of distribution revenue, with revenue up 12% to $67 million. That means Germany’s new reform could create more growth opportunities for Tilray.
The company ended the quarter with $261 million in cash, restricted cash, and marketable securities. Tilray also reduced outstanding convertible debt by $127 million in the quarter.
Tilray has strengthened its presence in the U.S. by acquiring Sweetwater Brewing Company, Alpine Brewing, and Breckenridge Distillery, among others. CEO Irwin Simon said, “ In the event of federal cannabis legalization in the U.S., we believe that Tilray is well-positioned to immediately leverage its strong U.S. leadership position and strategic strengths across operations, distribution, and brands to include THC-infused products.”
For fiscal 2024, the company anticipates adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) in the $68 million to $78 million range. Tilray also expects to generate positive adjusted free cash flow (FCF) this year. Analysts predict that Tilray's revenue will increase by 28.3% to $804 million in fiscal 2024.
As for analysts' ratings, Tilray has an overall “hold” on Wall Street. Out of the 11 analysts that cover the stock, three rate it a “strong buy,” seven rate it a “hold,” and one rates it a “strong sell.”
The average target price of $2.61 implies an upside potential of 32.5% from current levels. The Street-high estimate of $4.25 indicates the stock could surge as much as 115% in the next 12 months.
Growth Stock No. 2: Cresco Labs
My next choice is U.S. cannabis multi-state operator (MSO) Cresco Labs (CRLBF), which operates around 71 stores nationwide under the Sunnyside brand name.
Cresco's product portfolio is diverse, including medicinal and recreational products. Its strong market presence in limited-license states may continue to work in its favor.
The OTC-traded shares of Cresco are up 52.5% so far this year, outperforming the market as a whole, thanks to its recent strong Q4 results.
While federal legalization is still a long way off, the domestic market is already saturated. Cresco's revenue fell to $188 million in the fourth quarter, down from $190.5 million a year ago. Adjusted EBITDA nearly doubled to $55 million during the quarter.
Furthermore, the company reported a net income of $4.8 million, compared to a loss in the year-ago quarter.
To cut costs and remain profitable in the long run, the company intends to close low-performing cultivation facilities. At the end of Q4, Cresco had cash, cash equivalents, and restricted cash of $108.5 million, along with long-term debt of $497.7 million.
In 2023, the company generated $5.7 million in positive FCF, which is a good sign. Generating consistent positive FCF should help it reduce its debt levels.
For the full year 2024, analysts expect Cresco’s revenue to dip 3.4% to $744.3 million, before increasing by 6.08% in 2025.
Turning to Wall Street, Cresco Labs stock has a “strong buy” rating from the analyst community. Seven out of nine analysts that cover the stock rate it as a “strong buy,” while one rates it a “moderate buy,” and one recommends a “hold.” The average analyst target price of $3.68 implies a potential upside of 77.8% in the next 12 months.
The high estimate of $9.64 for Cresco's stock implies that the stock could rise as much as 367% from current levels. While this appears unattainable, the average target price is not out of reach if there is any positive movement toward legalization.
The Bottom Line
A significant shift in public attitudes toward cannabis is also leading to increased market acceptance and revenue growth for cannabis companies.
According to Statista, the global cannabis market could grow at a compound annual growth rate of 14.06%, reaching $102.9 billion by 2028. Despite the industry's growth, many cannabis companies are still in their early stages, allowing investors to earn significant returns if they choose the right companies.
I believe that if you are a patient investor with a high-risk tolerance, growth stocks such as Cresco Labs and Tilray could yield handsome returns in the long run.
Nonetheless, the cannabis industry is highly volatile and susceptible to regulatory changes. As a result, it would be prudent to diversify your portfolio with some stable stocks to minimize risk.
On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
