On Feb. 23, 2021, the AdvisorShares Pure U.S. Cannabis ETF (NYSEARCA:MSOS) announced it hit $1 billion in assets under management (AUM). Unfortunately, those halcyon days when cannabis stocks ruled have faded away. The fund’s AUM has dropped by over two-thirds since its peak.
Finding undervalued cannabis stocks is difficult in an environment with unfavorable revenue growth rates and profit margins. Of course, it doesn’t help that the U.S. federal government makes it much harder on U.S. cannabis businesses.
In early August, Mastercard (NYSE:MA) asked financial institutions to stop accepting transactions to buy cannabis with the company’s debit cards. The payment processor doesn’t want to disobey the federal laws prohibiting the sale, possession, and use of cannabis.
On both sides of the U.S.-Canadian border, the cannabis industry remains in flux, making it almost impossible to declare which marijuana stocks are undervalued.
Nonetheless, I’ve been tasked with doing so. Here are my three best guesses.
SNDL (NASDAQ:SNDL) is the first of two cannabis stocks that have moved into alcoholic beverages due to difficulties faced by pure-play cannabis companies.
I’ve become so disenchanted with cannabis stocks that I’m not even going to recommend something like Scotts Miracle-Gro (NYSE:SMG), whose Hawthorne Gardening subsidiary makes it an industry player. And it’s profitable. That would be too easy.
So, my first idea for undervalued cannabis stocks is the Calgary-based company. It does a little of everything, including retailing cannabis and liquor, growing cannabis, and financing other cannabis initiatives through its SunStream Bancorp joint venture with Calgary-based alternative asset manager SAF Group.
SNDL reported Q2 2023 revenue of 244.5 million Canadian dollars ($180.7 million), 9.3% higher than Q2 2022. All three of its operating segments experienced growth in sales during the quarter.
More importantly, it had adjusted earnings before interest, taxes, and depreciation (EBITDA) profit of 2.2 million Canadian dollars ($1.6 million).
“We have taken decisive steps to simplify operations throughout our business segments with a sharp focus on the goal of reaching profitability in 2024,” stated CEO Zach George.
“Over the last two years, SNDL has grown both organically and by acquisition while our leaders have implemented bold changes throughout the business,” added George. “We believe that we now have the requisite scale and platform optionality to create sustainable shareholder value.”
Based on annualized sales of approximately 1.0 billion Canadian dollars ($723 million), it trades at 0.61x sales. Already profitable on a non-GAAP basis, the upside of all of its moves can be worth the risk if you’re an aggressive investor.
Trulieve Cannabis (TCNNF)
In my March article, I said the Florida-based company had an enterprise value (EV) of $2.08 billion, 5.2x adjusted EBITDA. Today, its EV is $1.52 billion, 8.7x its adjusted EBITDA. Its profitability is going backward.
In Q2 2023, whose results it reported on Aug. 9, its adjusted EBITDA profits were $79 million, or 28% of revenue, down 700 basis points from Q2 2022. For the first six months of the year, they were $159 million, down from $216 million a year earlier.
So, on an annualized basis, they’re still $14 million over $300 million. It’s still making money, albeit on a non-GAAP basis. On a GAAP basis, it had an EBITDA loss of $309 million in the second quarter. Revenues fell 10% to $282 million.
Unfortunately, with its share price down 71% over the past year, it had a goodwill impairment of $308 million in the second quarter. If not, it would have generated an operating profit in the quarter.
With annualized revenue of $1.1 billion, it trades at 0.64x sales. With one of the largest retail dispensary networks in the U.S. (186 locations) and gross profit margins above 50%, Trulieve’s price-to-sale ratio seems low.
Tilray Brands (TLRY)
Tilray Brands (NASDAQ:TLRY) is the second cannabis pick of mine that’s getting deeper into alcohol. In Tilray’s situation, it’s solely producing. SNDL retails beer, wine, and liquor.
TLRY stock, while down 2.4% year-to-date, is up nearly 60% in the past month, much of the gains due to the big news on Aug. 7 that it was buying eight beer brands from Anheuser-Busch InBev (NYSE:BUD) for $85 million.
The beer brands include Shock Top, Breckenridge Brewery, Blue Point Brewing Company, 10 Barrel Brewing Company, Redhook Brewery, Widmer Brothers Brewing, Square Mile Cider Company, and HiBall Energy. The eight brands will join its existing brands — SweetWater Brewing Company, Montauk Brewing Company, Alpine Beer Company, and Green Flash Brewing Company — to become the fifth-largest craft brewer in America.
In addition to the beer business, it’s already a distiller through Breckenridge Distillery. It also makes Happy Flower CBD sparkling non-alcoholic cocktails.
The beer business will generate $250 million in annual revenue from 12 million cases, 3x its current volume.
“This is an exciting milestone for our beverage portfolio, no question. But I also want to emphasize that cannabis remains central to our overall strategy,” CEO Irwin Simon mentioned in a conference call.
“When federal cannabis legalization occurs, we’ll be able to include THC-based products and our beverage and wellness portfolios.”
As they say, you have to play the cards you’re dealt. For Tilray, at the moment, beer is the play.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.