Cannabis is quickly moving out of the shadows and transforming into a multibillion-dollar global industry. In the United States alone, Arcview Market Research and BDS Analytics estimate that total cannabis sales -- including hemp-derived CBD oils -- will come in at an eye-catching $44.8 billion in 2024.
This enormous commercial opportunity, in turn, has grabbed the attention of some of Wall Street's top analysts this year. A number of firms, for instance, have issued ratings, along with 12-month price targets, for a host of publicly traded cannabis companies in 2019. That's a remarkable turn of events, given that the industry was widely viewed as off-limits by most analysts less than two years ago due to the industry's problematic legal status in key territories, widespread banking restrictions, and long history of attracting unscrupulous actors.
Which cannabis stocks are at the top of Wall Street's initial report card? Analysts seem to favor Aleafia Health (ALEAF 10.22%) and Medmen Enterprises (MMNFF) as their top two cannabis picks, which, oddly enough, have also been some of the industry's worst performers so far this year. Is it time to catch these falling knives? Let's dig deeper to find out.
Aleafia Health: Upside potential of 389%
Among top-tier cultivators, Wall Street thinks that Aleafia Health has the highest upside potential by a wide margin with an average price target of $4.75. The reason? Last March, Aleafia made a game-changing transaction by snapping up the medical cannabis company Emblem in an all-stock transaction.
This acquisition greatly enhanced Aleafia's medical service provider network in Canada, access to high-margin derivative products, as well as its annual production capacity. In fact, this Emblem acquisition catapulted Aleafia into Canada's top 10 growers, with an estimated peak annual production output of 138,000 kilograms. Perhaps the best part, though, is that Aleafia's industry-leading cannabis clinic network has the potential to drive strong brand loyalty among its customer base.
What's the downside? The company is well behind the leaders in the space in terms of overall business development. While this Emblem transaction accelerated the company's evolution in a noteworthy manner, it still may struggle to compete against the industry's more established and better funded names -- especially those with Fortune 500 partners.
Bottom line: Despite the company's undeniable progress this year and Wall Street's rosy outlook, Aleafia's stock remains a high-risk, high-reward play. Thus, this small-cap pot stock is arguably best suited as a compelling watch list candidate at the moment, rather than an outright buy.
MedMen Enterprises: Upside potential of 167%
MedMen is an iconic, upscale U.S. cannabis retailer and Wall Street's second favorite cannabis stock based on its consensus price target of $6.38. The company has 86 retail licenses, active operations in five states with more on the way, as well as a partnership with Canada's Cronos Group that expands its footprint north of the border.
So, while there are gads of U.S. retailers at the moment, MedMen is arguably at the top of the heap from a brand recognition standpoint. Underscoring this point, the company also expects its annual sales to top $1 billion within the next few years, easily making it the largest U.S.-based cannabis retailer in terms of annual revenues.
Nevertheless, MedMen's shares have still managed to lose nearly 16% of their value this year due to the company's underwhelming financial performance. In the most recent quarter, for instance, the company reported a net operating loss of $53.3 million. And over the last nine months, MedMed lost a staggering $178.4 million. That's a worrying sign for a company widely pegged as the alpha dog among U.S. cannabis retailers.
What's next? MedMen's basic plan is to keep reducing its expenses while simultaneously growing its sales by opening new retail outlets in areas such as Arizona, Nevada, and Florida. Wall Street, for its part, believes that this strategy will lead the company to profitability within the next 24 months.
On the more speculative side of the ledger, MedMen's top-flight brand and sprawling U.S. presence could make it a takeover target. Cronos Group, after all, already has ties to MedMen and it has the cash to make a bid following its $1.8 billion partnership with tobacco giant Altria.
Is MedMen's stock worth buying at these levels? While the stock market has been enthralled with cultivators ever since Canada announced the legalization of adult-use marijuana for recreational purposes last year, the long-term trend arguably favors retailers like MedMen. Retailers that sell high-margin derivative products, after all, should be able to weather the upcoming supply glut much better than companies focused mainly on cultivation. Viewed this way, MedMen might indeed be one pot stock worth buying right now.