Please ensure Javascript is enabled for purposes of website accessibility

Forget Sundial Growers: These 3 Cannabis Stocks are Much Better Buys

By Billy Duberstein - Updated Feb 15, 2021 at 8:48AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Don't get too close to the sun, or you could get burned. But there are other great cannabis stocks you can still buy.

If you take the push toward cannabis legalization in the U.S. and mix in Robinhood traders on Reddit message boards and the current trend of pumping up low-priced penny stocks, you get Sundial Growers (SNDL -5.31%). Sundial has become the flavor of the day for day traders, and the beaten-down stock surged as much as 500% in 2021 before settling into just a 340% gain recently.

SNDL Chart

SNDL data by YCharts

However, here at Fool.com, we're investors, not traders. As we recently saw, other heavily shorted stocks pumped by Reddit investors have surged spectacularly, only to crash and burn when the momentum runs out.

Yet the truth is there is real cause for excitement in the cannabis space. According to MarketsandMarkets, the legal global cannabis market is set to more than quadruple over the next six years, from $20 billion to $90 billion.

But that growth primarily won't come from Sundial, or even most Canadian pot stocks. Instead, here are three much better U.S. pot stocks that are far superior, and well worth your investment dollars today.

A young woman holds a cannabis leaf in a field of cannabis plants.

Image source: Getty Images.

Trulieve, Cresco Labs, Green Thumb

If you're interested in actually investing in a business for the long term, and not just trading a ticker with the hope of some quick money, you need to look at fundamentals. That means revenue growth, margins, and defensibility.

Three of the more profitable and high-growth U.S. multi-state operators (MSOs) are Trulieve (TCNNF 2.78%), Cresco Labs (CRLBF 2.76%), and Green Thumb Industries (GTBIF 6.82%). Check out how these all-star pot stocks have performed in their recent quarters compared with the lowly Sundial:

Most Recent Quarter

Cresco Labs

Green Thumb Industries

Trulieve

Sundial Growers

Revenue growth

323%

131%

92.8%

(54.1%)

Gross margin

51.6%

55.3%

75%

(134.4%)

Adjusted EBITDA margin

33.9%

33.9%

49.5%

(34.3%)

Data sources: Cresco Labs, Green Thumb Industries, Trulieve, and Sundial Growers SEC filings.

Quite a difference, isn't it? Obviously, some think that Sundial's $2.08 share price as of this writing means it's "cheap." However, the company currently sports a $3.1 billion market cap -- not exactly small, or that far below Cresco's $6 billion market cap, Green Thumb's $8 billion market cap, or Trulieve's $5.6 billion market cap.

Big differences in performance and value, explained

The difference between a Canadian grower like Sundial and  U.S. multi-state operators has a lot to do with where they're located.

These highly profitable U.S. operators operate specifically in friendly states that either have limited licenses or regulations that help limit competition to the early movers. For instance, Trulieve dominates the Florida medical market, where there are limited licenses as well as regulations that require vertical integration for all dispensaries. That means only large-scale companies with the financial heft to invest in growing, processing, and building retail facilities can compete.

Green Thumb has a presence in 12 markets, especially in its home state of Illinois and Pennsylvania, two highly regulated and limited-license states. Cresco also plays in those states, and is also taking aim at the giant California market via wholesale operations. Though California is a more difficult market, it's also the largest cannabis market in the world, where Cresco's wholesale-tilted strategy could work.

This is a much more favorable environment than Canada, which has been plagued by regulatory hangups in rolling out retail dispensary locations, leading to a thriving black market. A much smaller market than the U.S., the country has also been plagued by oversupply, causing a collapse in pricing.

But U.S. stocks are harder to buy than Canadian growers like Sundial

One of the explanations as to why investors continue to buy Sundial over clearly much better businesses in the U.S. is that these U.S. businesses still trade over the counter, or not on major exchanges, due to marijuana still being illegal in the U.S.

However, this technical hangup doesn't mean you should throw your lot in with an overvalued company, just because you can trade it on certain brokerages. And if and when cannabis becomes legal in the U.S., which seems like a question of "when" and not "if," one can bet there will be considerable demand for the stocks of these U.S. MSOs.

If your online broker doesn't allow you to trade over-the-counter stocks like the U.S. cannabis companies, there are alternatives. For instance, AdvisorShares Pure US Cannabis ETF (MSOS 5.63%) is an actively managed exchange-traded fund allocated to U.S. cannabis companies, with big positions in the aforementioned stocks. It's also available on the NYSE Arca exchange, and available to trade on the popular discount brokerage Robinhood, which typically doesn't allow trading in over-the-counter stocks.

In any case, cannabis investors should know that while there's a real growth opportunity here, they need to be careful about which companies they pick and in which markets. The difference to your portfolio could be rags or riches.

This article represents the opinion of the writer(s), who may disagree with the "official" recommendation position of a Motley Fool premium advisory service. We're motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Sundial Growers Inc. Stock Quote
Sundial Growers Inc.
SNDL
$0.42 (-5.31%) $0.02
Green Thumb Industries Stock Quote
Green Thumb Industries
GTBIF
$13.00 (6.82%) $0.83
Trulieve Cannabis Stock Quote
Trulieve Cannabis
TCNNF
$15.16 (2.78%) $0.41
Cresco Labs Inc. Stock Quote
Cresco Labs Inc.
CRLBF
$4.09 (2.76%) $0.11
AdvisorShares Trust - AdvisorShares Pure US Cannabis ETF Stock Quote
AdvisorShares Trust - AdvisorShares Pure US Cannabis ETF
MSOS
$14.63 (5.63%) $0.78

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
330%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/22/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.