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

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 -1.75%). 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 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.

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 -2.53%), Cresco Labs (CRLBF -5.83%), and Green Thumb Industries (GTBIF -3.28%). Check out how these all-star pot stocks have performed in their recent quarters compared with the lowly Sundial:

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 -1.70%) 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.