The cannabis industry has been on a rollercoaster ride from the beginning, thanks to the perpetual overhang of regulatory uncertainty. But there's been a glimmer of hope for weed stocks after the U.S. Department of Health and Human Services recently suggested that marijuana should be moved from Schedule I to Schedule III. This might sound a bit bureaucratic, but it could mean big, positive changes for the industry in key areas like taxation, funding, and hiring. However, don't pop the champagne just yet; the DEA hasn't given the final nod, and even if they do, marijuana would still be subject to federal regulation.
So, how is this affecting stocks in the marijuana industry? Well, Canopy Growth (CGC) - the Canadian big shot that was the largest cannabis company in the world by market cap just a few short years ago - has fallen pretty far from its 2019 highs. Thanks to an inventory glut, regulatory red tape, and fierce competition, the shares have lost nearly 99% of their value since then, and they've also lost the support of Wall Street in the process.
Canopy Growth might still be one of the best-known names in the cannabis industry, but today the shares are firmly in penny stock territory - and only one single analyst out of 11 recommends buying CGC.
With the prospect of a major potential growth driver on the horizon, we're shifting the focus away from CGC and onto three other stocks that analysts like much better. They've all earned a consensus "buy" label, and analysts believe these stocks have plenty of upside potential.
Leafly Holdings: Cannabis Retail and Brand Connection Platform
Leafly Holdings (LFLY) is a go-to platform in the cannabis industry, connecting consumers with local dispensaries, delivery services, and brands. The company operates across 28 states and 10 countries, serving over 125 million visitors each month, with 18,000 licensed cannabis businesses in its network.
Notably, Leafly Holdings has demonstrated impressive performance in the cannabis sector, marked by robust revenue growth, improved net income, and favorable analyst ratings. Looking at its stock performance, Leafly Holdings has shed nearly 43% year-to-date - but over the last two months, the shares are up about 8.1%.
It's also worth noting that the company recently executed a reverse split, a move designed to keep the low-priced shares in compliance with Nasdaq listing standards (and out of over-the-counter status). Presently, the company has a market capitalization of $14.82 million, which is relatively modest compared to some competitors in the cannabis sector. This suggests there's ample room for growth, particularly if they can seize opportunities related to the possible rescheduling of marijuana in the U.S.
In financial terms, Leafly Holdings reported solid results for the second quarter of 2023. Revenue hit $10.68 million, marking a 29% year-over-year increase, and the net loss of $1.44 million was down 71% year-over-year. The bottom-line results beat expectations - and in fact, their earnings per share (EPS) have regularly surpassed analysts' estimates over the last four quarters.
Analysts have a positive outlook for Leafly Holdings, which has an average rating of “moderate buy.” Two analysts rate the stock a “strong buy,” while two more call it a “hold.”
The average target price for the stock stands at $40.00, indicating a potential 450% upside from the current price. Analysts cite optimism over the company's strong brand recognition, loyal customer base, and innovative product offerings as growth drivers for LFLY.
Cresco Labs: Vertically Integrated Cannabis Producer and Retailer
Cresco Labs (CRLBF) is a cannabis producer and retailer that wears many hats, handling everything from cultivation to retail. They're active in 10 states and have secured 32 retail licenses, offering an array of products including flower, edibles, vapes, concentrates, and topicals. At present, Cresco Labs carries a market capitalization of just $559 million, making them a mid-sized player in the cannabis space.
The OTC shares of Cresco are turning heads in the world of cannabis stocks. The stock is still down about 9% in 2023, but it's gained an impressive 38.73% over the past two months.
The company recently dished out some financial results for Q2 2023, boasting a revenue of $197.9 million - a hearty 123% year-over-year jump - and a reduced net loss of $36.5 million, down 46% year-over-year.
That said, Cresco has been struggling to meet analysts’ expectations in recent quarters, reporting losses that were larger than anticipated.
Despite these setbacks, Cresco Labs still has a strong presence in the U.S. market, and could leverage its growth potential and competitive edge in the future. With a debt-to-equity ratio of 1.14, they're playing it more conservatively than some of their cannabis peers. And their price-to-sales ratio stands at 0.68, which is pretty modest compared to the industry norm.
In the analyst corner, there's a fair bit of optimism about Cresco Labs. Ten analysts have weighed in, and the consensus is a “moderate buy.” Five call the stock a “strong buy,” and the other five suggest a “hold.”
The average target price for the stock is $3.28, which hints at a potential 101% upside from the current price. Analysts highlight the company's strong market presence, operational excellence, and strategic partnerships as the key drivers behind its growth.
Cronos Group: Global Cannabinoid Innovators
Cronos Group (CRON) is a dynamic player in the world of cannabinoids, crafting and distributing high-quality cannabis products in both Canada and across the globe. Their focus revolves around creating cutting-edge technologies, brands, and formulations for both the medical and recreational markets. Of note, Cronos Group is joined at the hip with Altria Group (MO); the tobacco industry heavyweight owns a roughly 41% stake in the company.
CRON hasn't had the best time since the start of 2023, down more than 25% YTD. However, like its cannabis peers, the stock is positive over the past two months, up roughly 9% in this time frame.
For the second quarter of 2023, Cronos pulled in $19.02 million in revenue, marking a solid 58% year-on-year growth, and managed to cut down their net loss to $8.36 million, a 67% YOY improvement. This boost in revenue is attributed to their successful launch of new products, increased sales volume, and slightly higher prices. Cronos Group is making strides in the EPS department, outpacing analysts' predictions in the past two quarters.
As for market capitalization, it's sitting at $712 million, which is on the higher end compared to some of its cannabis industry peers. But this reflects their innovative prowess and competitive edge, particularly given their partnership with Altria.
Now, analysts have a mixed bag of opinions about the Cronos Group - but the average rating among the 11 tracking the stock is a “moderate buy.” Among them, three advocate for a “strong buy,” seven propose holding onto your shares, and one recommends a “moderate sell.”
The average target price for the stock clocks in at $2.64, indicating a potential 40% upside from the current price. Analysts pinpoint the company's innovation strategy, international expansion, and its partnership with Altria as key strengths propelling its growth.
Conclusion
There's no doubt that cannabis stocks continue to captivate the attention of investors and analysts alike. As investors weigh their options, these buy-rated companies with plenty of room for growth are worth adding to your watchlist. The cannabis industry's potential for upside is undeniable, but it's equally important to stay alert to shifting regulations and market dynamics that can add risk to these low-priced picks.
On the date of publication, Ebube Jones 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.
