The perception of cannabis has changed significantly over the last decade. While in the not too distant past, weed was associated with an alternative lifestyle, the ancient herb’s medicinal benefits have finally been recognized by the establishment, to the extent that cannabis companies are listed publicly, and in some cases have former republican congressmen and conservative prime ministers as board members. The times, they have a-changed.
Accompanied by bursts of volatility, the industry exhibited massive growth between 2014 and 2018, with worldwide cannabis sales more than tripling to $10.9 billion. 2019, however, has been a rough one for the fledgling market, and over the past eight months, many cannabis stocks have lost at least half of their value, sometimes significantly more.
However, according to investment banking firm Needham, the pullback has provided the perfect opportunity for entry.
“We expect the legal cannabis industry to be one of the fastest growing categories globally, with global revenues more than doubling from $15B in ’19 to $37-40B by ’24. As is often the case in new or high growth industries, optimism with regard to the pace of progress didn’t align with the reality of category development. In the group's market drawdown of ’19, companies with better fundamentals were not always spared, and we believe a real opportunity exists to pick individual winners in the space,” Needham's Matt McGinley wrote.
McGinley recently initiated coverage on two promising cannabis stocks. Interestingly, the TipRanks’ Stock Screener reveals that both have a healthy upside potential alongside a Strong Buy consensus rating. Let's take a closer look:
Curaleaf Holdings (CURLF)
So you want to invest in a marijuana stock, but you don’t know which one to pick? That’s not an uncommon dilemma for investors these days, as they continue to struggle with valuation metrics and market size estimates. So let's get started with McGinley’s first recommendation -- Curaleaf.
McGinley initiated coverage on Curaleaf with a Buy rating and a $7.25 price target, indicating possible gains of about 20% could be in place.
Curaleaf has a foothold in 19 states, with 50 dispensaries, along with 14 cultivation sites. Multiple state operators (MSOs) have several advantages over single state operators because cannabis is not allowed to be sold over state lines, therefore limiting market opportunities. Geographical diversity also reduces single market risk, while also having a multi-state presence increases the likelihood of being in a state that legalizes adult use.
Legal cannabis revenues are expected to grow from $9.2 billion in 2019 to $22.5 billion by 2024 in states where Curaleaf operates, with estimates that these markets will contribute 80% of total industry growth over the next five years. 11 of those have medical markets and McGinley thinks that 5-7 of those states have a reasonable likelihood of going adult-use legal in the next 5-years.
Curaleaf’s recent acquisitions of Grassroots and Select (barring any unforeseen hurdles in closing the deals) have also significantly enlarged Curaleaf’s clout. The acquisition of Grassroots unites the US’s largest public and largest private multi-state operators, and cements Curaleaf's position as the world's largest cannabis company by revenue. And while no single brand has yet to emerge as the dominant leader nationally, Select is well known on the west coast and Curaleaf is known on the east coast, meaning the Select acquisition will increase visibility in almost every market.
McGinley noted, “We expect Curaleaf to be FCF positive by mid-2020; its present capital structure is strong. With the exception of $75mn in funding needed to close the Grassroots acquisition, we do not foresee the company requiring external funding. For many single and multi-state operators, the inability to access capital has and will make it difficult to bring development plans to an operational status. While there is risk with acquisition integration and managing the cost structure of a growing business, we expect Curaleaf to be almost singularly focused on execution in the coming year.”
Mcginley’s positive thesis for Curaleaf is dwarfed by the rest of the Street’s assessment, as 7 "buy" and 1 "hold" ratings provide the pot producer with a Strong Buy consensus rating, alongside an average price target of $11.60. This outcome will provide an increase of a substantial 96% from the current share price.
Trulieve Cannabis (TCNNF)
Unlike this year’s trend in the cannabis industry, Trulieve has performed very well in the market. The stock started the year at $8.67 and has increased by nearly 50% year-to-date. Adding to the good news, McGinley has initiated coverage on the medical marijuana provider with a Buy rating and $20 price target, indicating upside potential of over 50%.
Truelieve has operations in 4 states, but right now is mainly focused on Florida, where it is the dominant force in the market. At the end of 2016, the company had just two medical cannabis dispensaries in the state, but recently opened its 40th. The company stands to make the most of its presence in Florida once the state approves recreational use sometime in the future.
Unlike most of the major MSOs, Trulieve isn’t banking on a major deal to generate revenue growth, but instead, is focused on profitability, and shareholders have benefited handsomely from the strategy this year.
McGinley opined, “We believe that Trulieve exhibits one of the lowest risk profiles among publicly traded MSOs in that it is highly EBITDA generative, and therefore has valuation tangibly grounded in existing profitability and demands no reliance on expectations for investments converting into profitable operations.” The analyst added, "We expect Trulieve to make disciplined acquisitions in the coming year, by either buying entry into new states or by attempting to gain greater scale by purchasing assets in existing markets or in regional hubs… Exceptional operations in Florida provide a profitable foundation for growth into new markets not properly discounted in the share price, in our view.”
The rest of the Street is reading off the same leaf as McGinley, as TipRanks analytics demonstrate Trulieve as a Strong Buy. This break down into a unanimous 5 "buy" ratings alongside a price target of $20.34.