Over the past six months, cannabis stocks have turned into the 2019 Cleveland Browns of the investing world. In effect, enthusiastic fans widely expected this group of equities to be world beaters heading into 2019, but their on-the-field performance has been another thing entirely so far this year.
Some of the biggest names in the space, such as Aurora Cannabis (ACB 8.70%), Canopy Growth (CGC 4.76%), Cronos Group (CRON 3.93%), and Tilray (TLRY), for instance, have all seen their share prices drop by more than 50% since the start of May. Worse still, these Canadian pot titans still sport exorbitant valuations based on their near-term growth prospects -- even after their drastic declines during the second half of the year.
The point is that there aren't many cannabis stocks actually worth buying right now. There is one glaring exception to this trend, however. The Chicago-based multistate cannabis operator Cresco Labs (CRLBF -2.79%) could be gearing up for an absolutely monstrous run in 2020 and beyond. Here's why investors might want to grab some shares of this grossly undervalued pot stock in November.
All systems are go
Cresco's investing thesis boils down to one simple factor: its upcoming acquisition of the top-tier California marijuana distributor Origin House (ORHOF). This all-stock transaction is expected to close by no later than Nov. 15, according to Marijuana Business Daily. And once it does, it could radically change the investing landscape for the legal marijuana industry as a whole.
The quick rundown is that the combined entity would sport 67 pro forma retail licenses across 11 U.S. states, 1.5 million square feet of cultivation space, more than 725 dispensary partners, and more than 56 top-flight cannabis brands spanning the entire spectrum of product segments. Most critically, Wall Street's high-end estimate has this newly formed cannabis behemoth generating upward of $800 million in annual sales in 2020. That's a staggering revenue figure for a company with a sub-$700 million market cap at present.
Putting this revenue forecast into the proper context, Cresco/Origin House's 2020 combined sales are expected to rival those of even Canada's largest licensed cultivators, Aurora Cannabis and Canopy Growth. Cronos Group and Tilray, on the other hand, are both projected to fall well shy of Cresco's 2020 revenues, despite their markedly higher valuations. So, by comparison, Cresco's stock comes across as a far more attractive buy than any of its Canadian rivals. But this pot company's value proposition becomes even more compelling when you factor in the long-term implications of this forthcoming merger.
Specifically, this combined entity should be a focal point for any top consumer goods company angling to enter the cannabis space. That's key, because a marquee partnership could give Cresco a nearly insurmountable competitive advantage over the broader field, perhaps transforming it into one of the world's premiere cannabis companies by the end of the next decade. That's a speculative take, to be sure, but there's a good chance that Cresco will at least form the basis of one of America's largest cannabis companies down the road -- all thanks to this game-changing tie-up with Origin House.
Canadian cannabis stocks have enjoyed a tremendous run over the past several years due to the country's decision to legalize recreational marijuana in 2018. However, the most promising long-term growth opportunities are undoubtedly in the United States. This singular fact should benefit underappreciated names like Cresco in the coming years -- especially after Cresco finalizes this landmark merger with Origin House. As such, cannabis investors may want to strongly consider buying and holding this stock for the long haul.