Cannabis stocks have gained significant ground in the last two weeks on news that U.S. regulators might reclassify marijuana as a Schedule III drug, down from its more highly regulated Schedule I status. A potential rescheduling would still mean cannabis is a controlled substance, but it would allow licensed producers much more latitude to expand into other markets, conduct research, access traditional sources of funding, and benefit from more favorable tax structures - ultimately fueling the industry's growth.
Since the rescheduling news broke 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 uptick in share price, CGC is still down 98% from its all-time highs, having erased significant investor wealth in the last five years.
And analysts don't seem to like the prospects for additional upside in CGC. The consensus rating among 12 analysts is a “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 wrestling with a plethora of industry-wide issues. First, the slow rollout of retail stores in Canada resulted in higher production volumes. Licensed producers were also impacted by cannibalization from the illegal market and rising competition, resulting in an oversupply of marijuana.
This, in turn, led to higher inventory levels and lower profit margins. In fact, in the last four fiscal years, Canopy Growth has reported cumulative operating losses of almost $3 billion. The fundamentals of Canopy Growth remain weak, making it a relatively high-risk investment today.
Here are three cannabis stocks that have more upside potential than Canopy Growth, according to Wall Street.
Green Thumb Industries
The financials of cannabis producers in the U.S. are much better compared to their Canadian counterparts. One such company is Chicago-based Green Thumb Industries (GTBIF), which has a market cap of $2.82 billion. The multi-state operator ended 2022 with $1.01 billion in revenue.
In Q2 of 2023, the marijuana company reported GAAP net income for the 11th consecutive quarter. It invested $240 million in capital expenditures in the last 12 months and opened six new retail stores in the June quarter. Its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) stood at $152 million, indicating a margin of 30%.
Plus, Green Thumb announced a $50 million share repurchase plan earlier this month.
Out of the 12 analysts covering GTBIF, nine recommend “strong buy,” two recommend “moderate buy,” and one recommends “hold.” The average price target for Green Thumb stock is $15.42, which implies expected upside of more than 38% from current levels.
Curaleaf
Massachusetts-based multi-state operator Curaleaf (CURLF) is valued at a market cap of $3.38 billion. With more than 150 retail stores, Curaleaf operates in 19 states, providing it with a decent footprint across the U.S.
In Q2 of 2023, Curaleaf reported revenue of $339 million, an increase of 4% year over year. While sales growth has decelerated in recent quarters, the company is focused on expanding into international markets, such as Europe.
In fact, in late 2022, Curaleaf acquired a 55% stake in Germany’s largest medical marijuana company. With Germany headed for legalization and marijuana sales in Europe forecast to surpass $8.5 billion this year, the company has room to expand its revenue base.
Out of the 12 analysts covering Curaleaf stock, eight recommend “strong buy,” one recommends “moderate buy,” two recommend “hold,” and one recommends “strong sell.” The average price target for CURLF is $5.53, which is 10% above current prices.
Cronos
The final cannabis stock on my list is Cronos (CRON), which is valued at $910 million by market cap. Due to a challenging macro environment, Cronos has focused on lowering its cost base and improving profit margins.
Earlier this year, Cronos exited CBD operations in the U.S. to focus on the recreational marijuana segment. The company also announced plans to exit a facility in Manitoba by the end of this year, and expects to reduce operating expenses between $20 million and $25 million in 2023.
Armed with $841 million in cash, Cronos is well-positioned to support its high burn rates and turn profitable in the future by focusing on higher-margin products.
Out of the 11 analysts tracking CRON, three have a “strong buy” recommendation, seven recommend “hold,” and one recommends a “moderate sell.” The average price target for the stock is $2.76, which is 22% higher than current levels.
