Marijuana stocks have not delivered the returns investors had hoped for, but with a growing number of cannabis stocks turning a profit, interest in the industry could pop in 2022.
Innovative Industrial Properties (IIPR) — With potential 102.78% upside, this cannabis-exposed REIT is expected to increase profit margins this year and is a great hedge against rising inflation.
Canopy Growth (CGC) — With 18.56% upside, the marijuana purveyor is focusing on turning a profit, which could deliver a sturdy upside for the leading cannabis stock.
Verano Holdings (VRNOF) — A whopping 223.2% upside is evident in robust fundamentals and cheap valuation metrics that make this vertically integrated marijuana stock a long-term buy.
Green Thumb Industries (GTBIF) — At 194.4% upside, the profitable cannabis stock trades at a fair premium compared to peers, due to enhancing net profit margins and fast top-line growth.
Hydrofarm Holdings (HYFM) — We see this with 183% upside and a buy considering its knexpensive valuation metrics, steady top-line growth, and enhancing profitability that bode well for the diversified hydroponics stock.
Cresco Labs (CRLBF) — Has 174.3% upside due to rapid revenue growth and a 2022 profitable exercise that should make the shares of this cannabis stock pop.
Trulieve Cannabis (TCNNF) — The most potential of the bunch, at 264.86% upside, this is one of the few profitable marijuana stocks out there and it exchanges at relatively low valuation metrics.
Marijuana leaves on various colors of green and yellow on top of a black background
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Marijuana stocks have disappointed market participants since the beginning of the year, as investors who engaged in this growing industry capitulated, bringing strong headwinds to cannabis shares. The nascent industry is however gaining wider acceptance in an growing number of states, contributing to the long-term development of the U.S. market. Some of the firms operating in the industry turned a profit in 2021 and an increasing number of companies are expected to become profitable this year, providing strong tailwinds for their equity story.
The cannabis sector has been beaten in the past year and a leading exchange-traded fund measuring the performance of the industry, the AdvisorShares Pure US Cannabis ETF (NYSEARCA:MSOS) tumbled 46% to $14.23 per share.
This poor performance is an opportunity for investors looking to enter a booming industry, which is expected to grow, according to Fortune Business Insights, at a compound annual growth rate of 32.04% in the 2021-2028 period to a terminal value of $197.74 billion.
Let’s take a look at these seven marijuana stocks with improving fundamentals that are trading at an attractive price and set to deliver sturdy gains in the coming years:
Innovative Industrial Properties (NYSE:IIPR) is an internally managed real estate investment trust (REIT), focusing on the acquisition, ownershi, and management of regulated state-licensed cannabis facilities. IIPR stock dipped 47.6% since the beginning of the year to $138.47, slightly underperforming the cannabis sector.
The REIT recently reported first-quarter 2022 results, posting a 50% revenue growth, a 36% net income increase, and a 40% adjusted funds from operations (AFFO) advance from the prior year’s quarter. Going forward, the consensus of analysts expect IIPR to expand at a fast clip. The top line is projected to jump 40.5% in 2022 to $288 million, whereas net profit should advance faster, up 47.8% year-on-year to $167 million. With these developments, Innovative’s profit margin is estimated to increase by 290 basis points to 58%, a level slightly higher than REIT industry’s average.
While the cannabis-exposed REIT is one of the most profitable marijuana stocks in our selection, it is also the most expensive. IIPR stock exchanges at a forward EV/EBITDA of 14.5x and has a 2022e ratio of 21.4x. . Yet, investors seeking exposure to marijuana stocks should consider buying this cannabis REIT on the dip, given that it is well-positioned to deliver steady gains in an inflationary environment.
Canopy Growth (CGC)
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Canopy Growth (NASDAQ:CGC) is a world-leading diversified cannabis, hemp and marijuana device company, with a 10% market share in the Canadian market. CGC stock is down 40.32% year-to-date to $5.92 per share, as investors ran away from pot stocks in this volatile equity environment.
CGC’s top line is estimated to slow this year, as net sales are expected to shrink moderately down 9.2% to CAD 551 million, due to declining Canadian cannabis sales. Yet, the company is streamlining costs and anticipates achieving profitability in Canada by “taking additional steps to simplify its business and optimize expenses,” while making strategic investments in key growth areas.
If these plans go by the book, CGC stock could see significant tailwinds, as the nascent industry remains profitless. Besides, analysts are expecting CGC stock to turn a profit this year, posting a net profit of CAD 182 million ($141 million), representing a high-profit margin of 33.1% per year.
Canopy Growth trades however at a premium in terms of P/E ratio, posting a forward ratio of 15.2x, but has a more attractive 2022e EV/Revenue of only 5.29x.
Verano Holdings (VRNOF)
marijuana stocks Hand gently holding rich soil for his marijuana plants
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Verano Holdings (OTCMKTS:VRNOF) is a leading vertically integrated cannabis operator in the United States, operating over 1,118,000 square feet of cultivation across 15 production facilities.. VRNOF stock lost 40.76% of its market capitalization since the beginning of the year and is now trading at an all-time low of $7.5 per share.
The marijuana stock has robust fundamentals and is expected to turn a profit this year, boding well for its stock price. After growing at a hefty pace, up 222.3% to CAD 738 million in 2021, net sales are estimated to expand by 31.8% to $973 million this year, offering a comfortable operating margin of 27% on the year. Besides, analysts expect net income to reach CAD 125 million this year, versus a net loss of $147 million in 2021, representing a double-digit net profit margin of 12.8%.
VRNOF’s net debt is projected to expand from CAD 191 million in 2021 to CAD 264 million in 2022, representing however a low leverage ratio of 0.67x, which should be sustainable for the cannabis stock. Moreover, Verano exchanges at attractive multiples, posting a forward EV/EBITDA of 6.86x but has a pricier 2022e P/E ratio of 20x.
Green Thumb Industries (GTBIF)
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Green Thumb Industries (OTCMKTS:GTBIF) is a U.S.-based national cannabis consumer packaged goods company and a retailer, operating 17 manufacturing facilities and 75 open retail locations. GTBIF stock marginally underperformed the cannabis sector since the beginning of the year, dipping more than 45% to $13.12 per share.
In the last two quarters, the marijuana retailer beat analysts’ revenue and EPS guidance, indicating GTBIF’s strong track record. Besides and while net sales growth flattened in Q1 2022 to CAD 243 million, revenues are expected to advance 17.8% to CAD 1.05 billion this year and 26.8% to CAD 1.33 billion in 2023.
More interestingly, GTBIF has been profitable in the last seven quarters and net profit should expand by 9.4% to CAD 825 million, offering a moderate net profit margin of 7.84% this year.
After the steep year-to-date correction seen on GTBIF stock, the marijuana stock is still slightly overpriced, trading at a forward P/E ratio of 38.1x, but exchanges at cheaper multiples in terms of EV/EBITDA, with a ratio of only 9.64x. Moreover, analysts offer a huge upside on Green Thumb’s equity story of 194.4%, representing an average target price of $36.33 per share.
Hydrofarm Holdings (HYFM)
aurora stock
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Hydrofarm Holdings (NASDAQ:HYFM) is an independent distributor and manufacturer of controlled environment agriculture (CEA) equipment, used to grow, farm and cultivate cannabis, flowers, herbs and other vegetables. HYFM stock tumbled 73.45% to as low as $6.00 per share over past 52 weeks, gaining back recently to $8.04, and still representing a great opportunity to buy this stock exposed to the cannabis industry.
After a complicated 2021, Hydrofarms’ forward guidance is on an accelerating path, which should support its stock in the next quarters. Net sales are expected to advance 20.3% this year, to $576 million, whereas net income is forecasted to expand 69.4% to $22,7 million, offering a profit margin of 3.94% per year.
On the other side, HYFM’s balance sheet is estimated to improve this year. With net debt of $95.2 million last year, Hydrofarm’s net cash position is forecast to attain $18.2 million in 2022, which should contribute to sustaining the hydroponic grower’s stock. Moreover, Hydrofarm trades at a bargain in terms of 2022e EV/EBITDA, with a ratio of only 5.41x, and has a strong buy rating, with an upside potential of 196.6% and an average target price of $22.33 per share.
Cresco Labs (CRLBF)
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Cresco Labs (OTCMKTS:CRLBF) is one of the largest vertically integrated multi-state cannabis operators (MSO) in the U.S., with a leading distribution platform in North America. CRLBF stock declined 41.35% to $3.96 per share since the beginning of the year and has slightly outpaced the performance of the cannabis industry.
Cresco’s top line expanded rapidly in 2021 and is projected to continue on this path. After growing by 72.7% to $822 million in 2021, revenues are expected to advance 14.6% to $942 million in 2022. On the other side, the marijuana stock is estimated to deliver a profit of $34.9 million this year versus a net loss of $297 million in 2021. If the cannabis company succeeds in reaching profitability this year, it will deliver a net profit margin of 3.7% in 2022 and should see its stock price pop.
Besides, Wall Street analysts are bullish on the equity story, providing an average target price of $10.78 per share or an upside potential of 174.3% in the next 12 months. Moreover, CRLBF stock trades at a low forward EV/EBITDA of 5.87x and is a great investment candidate to lift its U.S. cannabis market share.
Trulieve Cannabis (TCNNF)
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Trulieve Cannabis (OTCMKTS:TCNNF) is another vertically integrated cannabis firm, with leading market positions in Arizona, Florida and Pennsylvania. TCCNF stock has been in for a rough ride this year, posting a year-to-date loss of 46.5% to $14.77 per share.
Despite this poor year-to-date performance, the marijuana stock is set to improve its profitability this year and its top line is expected to advance rapidly. Top-line grew heftily last year, jumping 79.7% to $938 million, and is projected to expand 43.5% to $1.34 billion in 2022. The bottom line is also estimated to improve, as net profit should balloon 166.1% to $479 million, corresponding to a yearly net margin of 3.56%.
Trulieve Cannabis is one of the few profitable marijuana stocks out there and it exchanges at relatively low valuation metrics. Indeed, with a forward EV/EBITDA of 5.47x, it can be a long-term opportunity for investors looking to enter the space. Moreover, the battered stock has a massive upside potential of 265.89%, according to the consensus of analysts, corresponding to a target price of $51.92 per share.
On the date of publication, Cristian Docan 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.
