In the world of cannabis stocks, the initial excitement and promise of lucrative profits have faded over the past few years, leaving investors disenchanted. However, there has been a recent resurgence of interest in these stocks. The AdvisorShares Pure US Cannabis exchange-traded fund (ticker: MSOS), which had plummeted 90% from its peak in 2021, has experienced a remarkable 50% surge in the past month, reaching a recent price of $7.15.
What has sparked this renewed interest? For one, the Biden administration has proposed reclassifying cannabis to a less severe category of federally illegal drugs. Additionally, a U.S. Senate committee has advanced a bill that aims to relax some banking restrictions for state-licensed cannabis operators.
While it remains uncertain whether a cannabis banking bill will successfully pass through the stagnant House of Representatives, there are cannabis operators who are generating cash and offer stocks that are not overpriced in relation to their cash flow.
Using FactSet, we have identified cannabis retailers with an enterprise value of at least half a billion dollars when considering their debt and stock market capitalization, while also subtracting their cash. Our screening process has yielded nine names, demonstrating that the recent impressive gains in the AdvisorShares Pure US Cannabis ETF do not reflect the wide disparity across the industry’s stocks. Former industry leader Canopy Growth (CGC) has dramatically declined and is now considered a penny stock. Meanwhile, Canadian competitor Tilray Brands (TLRY) has been grappling with falling marijuana prices and has attempted to diversify into the beer business. Both companies’ shares have witnessed significant declines throughout this year.
The State of the Cannabis Industry
According to FactSet, none of the weed sellers have been profitable over the past four quarters using generally accepted accounting principles. However, when noncash expenses are excluded, some companies are generating cash from their operations. In fact, three companies – Green Thumb Industries, Verano Holdings, and Cresco Labs – have even managed to produce free cash flow, including capital expenditures, over the same period.
To assess the cheapness of these stocks in relation to their operating cash flow, we ranked them based on their last four quarters’ figures. Surprisingly, even after their recent rise, some companies still appear to be undervalued. Green Thumb, Verano, Cresco, and Trulieve Cannabis all trade at or below a 10-times multiple of trailing Ebitda (earnings before interest, taxes, depreciation, and amortization). In comparison, the S&P 500 has recently had an Ebitda multiple above 15.
Despite limited federal government support for the cannabis industry this year, there are still growth opportunities as states continue to loosen their laws. For example, New York state is on the verge of announcing over 1,000 recreational marijuana licenses after spending two years developing regulations.
With continued progress in the legalization of marijuana, the industry has the potential to become a lucrative investment opportunity.