Marijuana stocks have had a rough road, at least up until President Joe Biden won the U.S. presidency. Then they took off. Some of them skyrocketed. However, the honeymoon period is over, and a good number of these stocks have dropped significantly. This article is about seven marijuana stocks that can be bought now for the long term, as they look like they are bargains. Or else they may soon become bargains.
Most of these stocks have multibillion-dollar market capitalizations. Most are profitable now, and analysts believe their future is bright. In the traditional value-buying sense, these are not yet asset bargains. Their value could still spike once the U.S. market legalizes marijuana across many states. This may take a number of years. But their future now seems more secure now that the Biden administration is in power and may take steps to further legalize marijuana.
The following marijuana stocks are listed in order of their market cap size (except for the last one, for its own reasons), from the largest to the smallest. Let’s dive in and look at these stocks further.
- Curaleaf Holdings (OTCMKTS:CURLF)
- Tilray (NASDAQ:TLRY)
- Green Thumb Industries (OTCQX:GTBIF)
- Trulieve Cannabis (OTCQX:TCNNF)
- Cresco Labs (OTCQX:CRLBF)
- Harvest Health & Recreation (OTCQX:HRVSF)
- Cronos Group (NASDAQ:CRON)
Marijuana Stocks: Curaleaf Holdings (CURLF)
Market Cap: $10.3 billion
Curaleaf is the largest U.S. marijuana company, with headquarters based in Wakefield MA, but it’s listed in Canada with a Vancouver address. It also has the largest market capitalization of all marijuana stocks and reports in U.S. dollars. It has 106 dispensaries (i.e., marijuana stores) throughout the U.S. Furthermore, it also has 23 cultivation sites and 30 processing sites with a focus on highly populated, limited license states, including New York, New Jersey, Florida and Massachusetts.
On May 10, the company reported $260.3 million in Q1 sales, up from $230.3 million in Q4. It also reported positive EBITDA (earnings before interest, taxes, depreciation and amortization) profits of $62.6 million.
This makes it one of the rare marijuana stocks that actually are profitable on an EBITDA basis. Its EBITDA margin is also fairly high at 24%. Moreover, its gross margin is very high at 49%, although I don’t think that matters as much as its EBITDA margin.
As of Q1, the company had $315 million of cash and $340 million of outstanding debt net of unamortized debt discounts. That gives it a very conservative and safe balance sheet. As a result, its enterprise value (EV) today is $10.3 billion.
At this value, Curaleaf stock trades for 9.9 times EV-to-EBITDA (i.e., $10.3 EV / [$260.3 million x 4]). This is not cheap, but not excessively expensive. Moreover, based on analysts’ estimates for 2022, its trades for just 4.7 times 2022 sales. This stock looks like good value for the long term.
Market Cap: $8.874 billion
I recently wrote about Tilray and its recently closed merger with Aphria, both Canadian cannabis companies. It also had just closed on its acquisition of Atlanta-based Sweetwater Brewing Company. The combined company now says that it will have a larger 17% market share of the Canadian cannabis market. The combined company has an $8.9 billion market capitalization.
As a result of the merger, Tilray has identified 81 million CAD in operational pre-tax efficiencies. It says these will occur over 18 months. This is better than the original timeline by the company, which was for 24 months.
A recent Financial Times article depicts the Canadian cannabis market in a poor light. This was especially the case since Ontario has only recently started increasing approvals for the number of stores that could sell marijuana. The article says that the Canadian market is only 2.6 billion CAD now. But it is expected to grow to up to 10 billion CAD in the next several years.
If that occurs, Tilray (now with Aphria) is bound to take a good percentage of this increase, given its high market share of the Canadian market.
Marijuana Stocks: Green Thumb Industries (GTBIF)
Market Cap: $6.54 billion
Green Thumb is another large U.S. marijuana products company, based in Chicago, that trades on the Canadian Stock Exchange and over-the-counter in the U.S. Green Thumb has 13 manufacturing facilities, licenses for 97 retail locations and operates in 12 states. Its dispensaries operate under the Rise brand name.
Its market cap is about $6.5 billion and analysts estimate that 2021 sales will be $874.5 million in 2021 and $1.16 billion by 2022.
Given that it has about $275 million in cash and total debt of $100.1 million as of March 31, its enterprise value (EV) is $6.365 billion. This gives it an EV-to-sales multiple of just 5.5 times for 2022. This is pretty cheap, especially since the market for cannabis in the U.S. will be over $100 billion in several years. This is based on a slideshow presentation Green Thumg recently made available on its website.
The company recently reported a positive net income of $10.3 million in its latest quarterly returns. Moreover, its adjusted EBITDA was $71.4 million. This puts the stock on a run-rate EV-to-EBITDA multiple of 22 times. That is over twice the rate as Curaleaf (see above). But on the other hand, its EBITDA margin of 36.7% is 50% higher than Curaleaf’s 24% margin.
For example, assuming sales hit 1.16 billion by 2022, its adjusted EBITDA could be $426 million. This lowers its EV-to-EBITDA multiple to just 15 times. That is not too expensive for such a profitable company. Therefore, this looks like one of the better marijuana stocks for the long term.
Trulieve Cannabis (TCNNF)
Market Cap: $4.83 billion
Trulieve Cannabis is a multi-state operator (MSO) based in Quincy, Florida (near Tallahassee) that is a vertically integrated “seed to sale” cannabis company. It is the largest licensed medical marijuana operator in Florida. This means that it has the most dispensing locations and the greatest dispensing volume in that state.
The company is now profitable, and the stock looks to be very cheap. For example, based on analyst estimates, its earnings per share (EPS) forecast for 2022 is $2.44. Therefore, at today’s price (June 11) of $37.67 TCNNF stock has a forward price-to-earnings (P/E) multiple of just 15 times.
Moreover, sales for 2022 are forecast to reach $1.5 billion, or 71% higher than the $874 million seen for 2021. The company just made $90.797 million in quarterly adjusted EBITDA. This puts it at a run rate of $363.19 million for the year. That gives it a very cheap EV-to-EBITDA multiple. Here is why.
As as March 31, Trulieve had $162.45 million in cash and $306.7 million in debt, according to its latest 10-Q filing. This means that is EV is $4.97 billion. That implies that its EV-to EBITDA ratio is 13.7 times and its EV-to-sales is 3.31 times.
Moreover, its adjusted EBITDA margin is also very high at 50.46% (i.e., $90.797 million divided by Q1 sales of $193.8 million). Therefore, if the $1.5 billion in sales for 2022 occur, its adjusted EBITDA will reach $757 million. Therefore, its $4.97 billion EV is only 6.6 times forward adjusted EBITDA. That is very cheap indeed, probably the cheapest U.S. marijuana stock listed now.
Marijuana Stocks: Cresco Labs (CRLBF)
Market Cap: $3.79 billion
Cresco Labs sells retail and medical cannabis products in 10 states in the U.S. and has 32 operational dispensaries. Just like many of the other U.S. marijuana companies, it is vertically integrated and owns its own production facilities. In addition, like others, it is building a number of national brands around its marijuana business.
Cresco announced on May 28 that it made $35 million in adjusted EBITDA in Q1 on sales of 178.4 million. This implies a cash flow margin of 19.6%. This is good in that it shows that the company is profitable, but it is an average profitability margin. However, its sales grew by 168.8% year-over-year (YoY) and even 9.9% QoQ.
Moreover, analysts estimate that sales next year will grow by 46% from $842 million in 2021 to $1.23 billion. This also implies that the stock is very cheap. Given that it has $255.55 million in cash and term debt of $187.9 million, its EV is $3.722 billion. Therefore, the EV-to-sales multiple is low at just three times 2022 forecast sales.
In addition, Cresco Labs has a cheap EV-to-EBITDA multiple. Assuming it makes a 20% margin (a slight improvement over its 19.6% margin in Q1), the 2022 EBITDA will be $246 million. This implies that the EV-to-EBITDA ratio is just 15 times. This makes it about average as a potential investment target — not too cheap, not too expensive.
Harvest Health & Recreation (HRVSF)
Market Cap: $1.79 billion
Harvest is a Tempe, Arizona-based marijuana company (near Phoenix where I live). It is another MSO that currently operates retail and cultivation/processing facilities in Arizona, California, Florida, Maryland and Pennsylvania. It also has processing facilities in Colorad0, Nevada and Utah.
On May 10, Trulieve and Harvest agreed to a combination whereby Trulieve will acquire Harvest Health in an all-share deal. Here is the deal: Harvest shareholders will receive 0.117 of a subordinate voting share of Trulieve for each Harvest subordinate voting share (or equivalent) held.
Let’s examine this. First, as of June 11, TCNNF shares were at $37.67 and HRVSF was at $4.06. Second, if we multiply 0.11 times $37.67, the value of the shares received will be $4.40739. Therefore, this is 1.0909 times the $4.04 price of HRVSF shares.
In other words, there is a 9.09% merger arbitrage opportunity here. Let’s say it takes three months to complete the transaction. That implies a 41.64% annualized compounded return on investment (ROI) (i.e., 1.0909 ^4 -1). However, if it takes four months to close, the ROI falls to 29.8%. Either way, the merger arb opportunity is greater than 20% to 25%, which is the base hurdle rate that most professional investors look for.
Moreover, the combined company looks like it will be a winner, assuming it receives regulatory approval. And I think Trulieve is probably getting a bargain price.
For example, the press release says that the deal is worth $2.1 billion as of the price of TCNNF stock on May 7. Since then TCNNF stock has fallen $3.25 or 7.95%, so the deal is presumed to be worth 92.05% of the $2.1 billion, or $1.933 billion. Since analysts estimate Harvest Health will make $524 million in sales by 2022, the price-to-sales ratio is just 3.68 times.
So, an investment in Harvest Health stock looks like it will be quite an arbitrage. As I pointed out above, Trulieve trades for just 6.6 times its forward adjusted EBITDA, which is a bargain. Now that its combination with Harvest is set to occur, the opportunity could be even better now that it will have more sales and earnings power.
For example, the deal slide presentation indicates that the combination will be “accretive” to Trulieve earnings. Although there are no synergies or savings listed in the deck, apparently the combined company’s revenue and earnings power will increase the overall combined earnings. That sounds like a good deal for everyone.
Marijuana Stocks: Cronos Group (CRON)
Market Cap: $3.25 billion
Cronos Group is a global cannabis producer, but recently it produced lousy earnings. I suspect that things are bad enough with the company that it could be on the block and ripe for a sale.
For example, the company reported on May 7 that its global operations produced $12.6 billion in Q1 revenue. But the company lost $37 million in adjusted EBITDA during the quarter. Moreover, even more disappointing, the company had a gross margin loss of negative 23%.
However, one good thing is that sales were up 50% YoY. This is mostly from the 63% growth in its non-U.S. cannabis business. However, during its conference call, the company did not provide any guidance as to when the company will reach any form of profitability, either on a gross or EBITDA basis. That is not good.
I highly suspect that the company is ripe for either a friendly or not-so-friendly takeover, or at least a management change. This cannot go on for very much longer. The company will eventually find it hard to raise capital. For example, it burnt through $46.6 million in cash flow from operations in the latest quarter. After a capex spending of $7 million, its free cash flow (FCF) loss was $53.6 million.
Fortunately, the company has cash and securities of $1.21 billion, so it can continue to finance over $212 million in FCF losses annually. But this won’t make the stock move higher. Look for something to change in the company soon.
On the date of publication, Mark R. Hake did not hold a position in any security in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.