You probably don't need to be told this, but legal marijuana is a fast-paced industry that's literally and figuratively budding before our eyes. Depending on your preferred source on Wall Street, we're talking about an industry that could be generating as much as $200 billion in annual sales in a decade's time.
The question that investors have to ask themselves is simple: Which marijuana stocks should I buy to take advantage of this growth?
If investors were to base their return expectations solely on Wall Street's price target projections, three marijuana stocks would stand out. While nearly every pot stock is expected to head higher, at least based on Wall Street's price targets, three, in particular, are forecast to triple in value from their current levels. Let's take a closer look to see whether the following three companies are genuine values or fool's gold.
First up is Aleafia Health (ALEAF 2.50%), which closed in Canada this past week at CA$0.90 (that's 90 Canadian cents), yet had a consensus target on Wall Street of CA$3 per share.
Earlier this year, Aleafia Health completed its game-changing combination with Emblem in a move that combined two companies that are focused on the medical-clinic model. In other words, these are two businesses that operate medical clinics, thereby prescribing medical marijuana to patients and attempting to keep these patients within their umbrella of in-house-produced cannabis products. Since medical marijuana patients generally deliver superior margins compared to adult-use cannabis users, there's been a lot of optimism since this combination was closed in March.
Further, putting Aleafia Health and Emblem together bolstered their aggregate cash position, as well as increased their fully funded production capacity to 138,000 kilos a year. Effectively, this merger made Aleafia Health a major marijuana player. Aleafia also has a processing campus that includes a 25,000-square-foot product innovation center and 50,000 kilos of annual extraction capacity (when completed), demonstrating that it has firm control of its supply chain from seed to sale.
The question about Aleafia Health is going to be whether or not the company can differentiate its products and nab significant domestic and international supply deals in a highly competitive marketplace. It's not enough to simply be a major producer. Aleafia will need sufficient capital to market and build its brands for Wall Street's lofty price target to become a reality.
Ultimately, while I feel Wall Street's forecast may be a bit aggressive, I do like the value proposition offered by Aleafia Health.
iAnthus Capital Holdings
Another cannabis stock with an incredible amount of perceived upside is U.S. vertically integrated dispensary operator iAnthus Capital Holdings (ITHUF 4.53%). iAnthus ended last week at $2.13 a share, but has a price target consensus on Wall Street of $8.23, implying upside of 286%.
The allure of U.S.-focused dispensary operators has to do with the sheer potential of the U.S. market. Compared to Canada, the U.S. should dwarf its northerly neighbor in legal sales, which makes the vertically integrated model so attractive. With regard to iAnthus, it has more than four dozen retail licenses in its pocket, including 27 open dispensaries in 11 states, according to its newest press release.
Following a recent acquisition in Nevada, iAnthus has a presence in some of the most lucrative markets in the United States. Despite its reasonably small population, Nevada projects as the leading state for per-capita cannabis spending by 2024. iAnthus also had a solid presence in Florida, which is legal only for medical marijuana at the moment. Nevertheless, the duo of Arcview Market Research and BDS Analytics forecast that Florida will be the third-largest market in terms of annual weed sales by 2024.
The drawback? iAnthus' appears to have grossly overpaid for its acquisition of MPX Bioceutical, completed earlier this year. At the end of the most recent quarter, iAnthus had CA$440.7 million in goodwill on its balance sheet, compared to CA$811 million in total assets. That's a major red flag suggesting that a writedown may be in iAnthus' future. This would be my guess as to why iAnthus has moved so far away from Wall Street's consensus price target.
When it comes to potential upside among marijuana stocks, none takes the cake more than Greenlane Holdings (GNLN -4.28%). Greenlane, which is among around a dozen marijuana companies to trade on a major U.S. exchange, closed this past week at $4.54 a share, but has a consensus price target from Wall Street of $20.10, implying upside of 343%.
What attracts Wall Street to Greenlane is the company's superior position as a supplier of tobacco and cannabis accessories. Greenlane's reach extends to more than 11,000 stores throughout North America, making it a jack-of-all-trades when it comes to the ancillary side of the cannabis market. Accessories companies should be considerable beneficiaries with Canada readying to launch derivative products in less than three months.
However, there are two massive grey clouds overhanging Greenlane at the moment. First, there's the U.S.-China trade war. Quite a few of Greenlane's core products and accessories are made in China and imported into the United States. Tariffs being imposed on these imports are set to drive costs higher, which could impact Greenlane's sales and/or margins.
Secondly, there are notable worries surrounding vaping in the United States. The Centers for Disease Control and Prevention had confirmed 530 cases of vape-related lung illnesses as of last week, as well as eight deaths. That's a relatively small number of vape users, but it's still disconcerting with the source of these lung illnesses remaining unknown. Vaporizer sales are a big component to Greenlane's success, making Wall Street's lofty price target seem like a fairytale for the time being.