Marijuana stocks have gone through a phase of euphoria in early fiscal year 2019 to a period of extended depression. With President Joe Biden assuming office, there are hopes of relatively accelerated nationwide legalization of marijuana. With steady growth, the legal marijuana market is expected to be worth $73.6 billion by 2027.
Looking at the stock price action, it’s very likely that the worst is over for marijuana stocks. While some stocks have surged higher in the recent past, there are others that trade at attractive valuations.
Let’s discuss four undervalued marijuana stocks to buy.
- OrganiGram Holdings (NASDAQ:OGI)
- Hexo Corp. (NYSE:HEXO)
- Sundial Growers (NASDAQ:SNDL)
- Aurora Cannabis (NYSE:ACB)
Marijuana Stocks to Buy: OrganiGram Holdings (OGI)
OGI stock has trended higher by 92% in the last six months. The stock however remains undervalued at a current market capitalization of $550 million.
OrganiGram is a provider of medicinal and recreational cannabis in Canada. For the first quarter of 2021, the company’s gross and net revenue increased by 42% and 30% respectively. I expect revenue growth to accelerate further in the coming quarters.
The company has launched 53 new stock keeping units (SKUs) since July 2020. Further, 14 new SKUs are expected to be launched in the second quarter. The company’s brands have been attracting consumer attention. As an example, Shred was the most-searched brand on the Ontario Cannabis Store website for November and December. This is the key reason to believe that top-line growth is likely to accelerate.
OrganiGram also generated positive operating cash flow of $300,000 for the fiscal first quarter of 2021. OGI stock will trend higher if operating cash flows swell in the coming quarters.
OrganiGram ended the most recent quarter with cash and short-term investments of $134 million. Therefore, there is ample financial headroom to invest in new SKUs and branding efforts in the next few quarters.
Hexo Corp. (HEXO)
Like most marijuana stocks, HEXO stock is on a strong run, surging 165% in the last six months. The stock, however, remains attractive from a medium to long-term investment horizon.
For the fiscal first quarter of 2021, HEXO reported revenue growth of 114% on a year-on-year basis. Strong top-line growth is likely to sustain with the company’s expansion beyond Quebec. HEXO already has a leading market share of 33% in Quebec.
HEXO reported operating loss of 60.4 million CAD for the first quarter. For the recent quarter, operating loss narrowed to 2.6 million CAD. HEXO expects to report positive EBITDA in the first half of the year. The company’s operating cash flow is also likely to turn positive in the coming quarters. This is another trigger for HEXO stock moving higher.
Production innovation is another reason to be bullish on the stock. The company has introduced cannabis-infused beverages. According to estimates, the North American cannabis-infused beverage market is expected to reach $1.56 billion by 2026. For the same period, the global market is estimated at $5.04 billion.
As of October, HEXO reported cash and equivalents of 149 million CAD. The cash position gives flexibility for pursuing growth.
Sundial Growers (SNDL)
SNDL stock is another name among undervalued marijuana stocks. The stock has seen some positive momentum in the recent past, which is likely to sustain.
The company is focused on delivering premium products with a focus on inhalables. Currently, the premium products are sold in the form of flower, oil, vapes and pre-roll. Sundial will also be launching cannabis-infused chocolate bars and beverages to expand the product portfolio.
Sundial also has 50% equity interest in Pathway Rx. The licensing agreement with Pathway Rx will allow the company to use certain cannabis strains for commercial production. In the coming quarters, it’s likely that Sundial launches medicinal cannabis products. This will serve as another stock upside trigger.
Sundial’s branded product sales have been increasing as a percentage of total sales. With revenue growth, steady EBITDA margin expansion is likely. Another important point to note is that the company is focused on deleveraging. With cost control coupled with a healthier balance sheet, SNDL stock is likely to trend higher.
Overall, Sundial Growers is in a phase of transformation. The company has reduced debt and is increasing the product portfolio. I will not be surprised if SNDL stock doubles from current levels.
Aurora Cannabis (ACB)
Compared to some other names, ACB stock has been a smaller part of the recent rise in marijuana stocks. In the last six months, the stock returned 24%. I believe that ACB stock is undervalued and can be considered for exposure at current levels.
A key reason to be bullish on ACB stock is the business transformation plan undertaken by the management. The company has been able to successfully reduce selling, general and administrative costs. In the coming quarters, cash burn is likely to decline significantly.
From a growth perspective, the company has presence in the medicinal as well as recreational cannabis segment. With focus on premium products and innovation, growth is likely to accelerate. As an example, the company has over 100 patent and patent applications.
Aurora has a cash balance of 450 million CAD. This provides ample flexibility for investment in the next three to four quarters. During this period, I expect the company to achieve operating level profitability. Scaling back production and shrinking the asset footprint is likely to help in accelerating operating level profitability.
Overall, ACB stock remains undervalued. While the company still needs to demonstrate top-line growth, cost cutting measures are a step in the right direction.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.