Cannabis stocks have fallen from their February highs, in part because investors did not see as much movement in cannabis reform as they had anticipated. The industry benchmark, the Horizons Marijuana Life Sciences ETF is down 6% so far this year compared to the S&P 500's surge of 19%. But now is not the time to give up on marijuana stocks. Most of the attractive U.S. multi-state operators (MSOs) are trading at a discount, making it a good time to think about adding them to your portfolio.
One such MSO is Illinois-based Cresco Labs (CRLBF 1.51%), which has grown its revenue dramatically by expanding in key markets that offer limited licenses. Its success is evident in its recent second-quarter results for the period ended June 30. Let's look at how Cresco Labs can set cannabis investors up for a fruitful future.
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Cresco Labs is expanding strategically
Cresco doesn't have as vast a national presence as its peers Green Thumb Industries (GTBIF 1.58%) and Trulieve Cannabis (TCNNF 0.41%), which have 58 and 100 operating dispensaries each, respectively. But even with only 37 dispensaries across 10 states, Cresco has been reporting outstanding revenue.
In its second quarter, total revenue jumped a whopping 123% year over year to $210 million. The company saw $101 million just from retail revenue, most of which is attributed to its Sunnyside platform. Management believes this is the "most effective and productive per-store retail platform among scaled national retailers." Cresco's brands (Mindy's Edibles, High Supply, Cresco Reserve, and more) have garnered a loyal customer base, which is also contributing to higher sales.
Other credit for its revenue growth can be attributed to its strength in its home state of Illinois. The state legalized recreational cannabis in January 2020, and since then, sales have been soaring. Through September, total recreational sales in 2021 have reached $997 million. Experts predict that total adult-use sales in 2021 will easily surpass last year's $1 billion. This market opportunity should be highly advantageous for Cresco, which now has 11 Sunnyside stores in the state.
It was smart of Cresco to target a lot of limited-license markets such as Pennsylvania, Illinois, and Ohio. These markets limit the numbers of licenses they issue to cannabis companies and how many dispensaries can open in the state, thereby restricting competition. This allows Cresco to build its brand awareness and attract loyal customers.
A profitable cannabis stock
Cresco Labs had been consistently reporting positive earnings before interest, tax, depreciation, and amortization (EBITDA) for the past few quarters. In its second quarter, EBITDA came in at $37 million compared to a loss of $12.4 million in the year-ago period. Its current rate of revenue and EBITDA growth also brought it into the black. This is the first quarter in which the company reported a net profit; $2.7 million was an outstanding improvement from its $41 million loss in the year-ago period.
The more the company expands in line with state legalizations ramping up, the better the odds of maintaining that profitability. Recently, it announced the acquisition of three dispensaries from Cure Penn in Pennsylvania. The deal, valued at $90 million in cash and stock, is expected to close by the fourth quarter of 2021. This will be in addition to the four dispensaries the company already has in the state.
On Sept. 30, the company announced it will stop serving as a distributor of certain third-party branded products and shift to selling its own brands in California. Management anticipates this will result in a dip in projected sales for the fourth quarter, ended Sept. 30. After adjusting its previous guidance, Cresco now expects revenue in the range of $235 million to $245 million, and it expects to achieve an annualized revenue run-rate of $1 billion by the end of 2021. We will know more about Cresco's growth strategies for the rest of the year when it reports its third-quarter results on Nov. 11.
This pot stock is attractively valued
Compared to its peers, Cresco is trading at a price-to-sales (P/S) ratio of two, which is quite cheap for a company that has tremendous growth potential. The company is expanding its national footprint as allowed, which will boost its revenue and (hopefully) allow it to maintain its positive bottom line. Wall Street analysts see an upside of 77% for the stock in the next 12 months, which should make long-term investors who have been thinking about Cresco Labs feel good about buying its stock today.
