Analyst Sonny Randhawa of Seaport Global Securities has hedged across a range of cannabis stocks as he believes an alternate scenario could unfold. He gave buy ratings to the following cannabis stocks – AAWH, CURLF and GTBIF – which I am also bullish on. According to Randhawa: “With constrained budgets, we believe new customer penetration rates could accelerate as consumers spend more time at home and the value for money ratio between cannabis and alcohol declines. stop growing.”
Over the past three months, Randhawa’s ratings have averaged a return of 10.5%, giving its ratings added importance.
The analyst’s base case is that cannabis is being treated as a substitute for alcohol and price elasticity could come into play. Randhawa’s take is interesting and seems reasonable. However, I have a few additional points to add to the debate.
Analyze the cannabis industry as a whole
The cannabis industry is expected to grow at a CAGR (compound annual growth rate) of 32.04% through 2028, with a few key players likely reaping most of the benefits. Randhawa mentions that MSOs (multi-state operators) could be the industry’s biggest beneficiaries because of their ability to better deflect additional legal “noise” from Washington.
Additionally, many cannabis companies have vertically integrated business models, even early in their business cycle. This is exceptionally rare as most industries only see their constituent companies going through vertical integration at mature stages.
Vertical integration offers high cost and price advantages; as such, cannabis companies are likely to achieve impressive profit margins early in their business cycles.
Ascend Wellness Holdings (AAWH)
Ascend Wellness Holdings is engaged in the cultivation, manufacture and distribution of cannabis-based consumer goods. The company flourished in 2021, achieving an 87.6% revenue growth rate.
Recently, the company obtained an additional credit of $36.5 million, which will be used for internal growth.
Ascend Wellness Chief Financial Officer Dan Neville said, “This funding will support our investments in near-term growth initiatives, including expanding our assets in Pennsylvania and acquiring MedMen NY. We continue to explore all financing options, including additional capacity under the term loan increase option. »
The entity’s footprint currently spans more than twenty dispensaries in five states, eight retail establishments and a single grow facility. Additionally, the company’s initial expansion is clearly not valued by the market, as the stock’s enterprise value to forward EBITDA ratio is 48.3% below the industry average.
Ascend Wellness is a very volatile stock. However, with the right timing, investors could benefit immensely by investing in the stock.
When it comes to Wall Street, Ascend Wellness gets a Strong Buy consensus rating based on three buys. Ascend Wellness’ average price target of $8.67 implies an upside potential of 248.2%.
Curaleaf is well placed in the cannabis value chain. The company’s vertically integrated “Growth to Consumer” segment is accompanied by a Services segment that assists new market entrants with value-added professional services.
Consequently, Curaleaf is one of the most established players in the industry, which is reflected in its three-year CAGR of 130%. Additionally, Curaleaf has a gross profit margin of 57.5%, suggesting that the company has achieved economies of scale, allowing it to possess pricing power.
Overall, Curaleaf can be considered a growth stock, as it trades with a surplus of 2.2 times its book value and 3.1 times more than its sales. However, with the company’s year-over-year EBITDA and operating cash flow growing 73.2% and 268%, respectively, Curaleaf investors could rest transcendent evaluation.
On Wall Street, Cureleaf earns a strong buy consensus rating based on eight buys and one hold. Curaleaf’s average price target of $11.55 implies an upside potential of 107.3%.
Green Thumb is another participant in the packaged medical marijuana industry. The company’s three-year revenue CAGR of 128% speaks volumes about market share growth, and its three-year CAGR of 92.5% in earnings from continuing operations indicates that the company is running a business model sustainable.
Green Thumb recently added two new hobby stores to its portfolio. The stores are located in New Jersey and were approved for operations on April 21. The company’s year-over-year capital expenditure growth of 241.4% suggests that rapid operational expansion may be a recurring phenomenon in the case of Green Thumb.
In addition, the company’s finances remain strong. Green Thumb had revenue of $242.6 million in the prior quarter, a year-over-year growth rate of 25%. More impressively, the company’s net income increased 179% year over year, increasing shareholder value by 12 cents per share.
Evaluation metrics also look good. The stock’s price-to-sales ratio is 85.5% below its five-year average, leaving a reasonable bias that the stock is undervalued.
When it comes to Wall Street, Green Thumb gets a strong buy consensus rating based on 10 unanimous buy ratings given over the past three months. Green Thumb’s average price target of $31.08 implies an upside potential of 224.4%.
Conclusion: Cannabis stocks could be great investments right now
After AdvisorShares Pure US Cannabis ETFs (MSOS) down more than 50% since the start of the year, it is insignificant that many cannabis stocks could be at investable price levels. Sonny Randhawa of Seaport Global believes that various circumstances could lead to a bull market in cannabis. Therefore, taking into account industry and market specific events, cannabis stocks could be among the best investments in the market.
The stocks mentioned in this article have all been upgraded by Randhawa and are, in my opinion, “best-in-class” assets.