The cannabis market is growing rapidly. According to Fortune Business Insights, the global marijuana market hit a value of $28 billion in 2021 and could grow as large as $198 billion by 2028, averaging more than 30% in annual growth. But investors have had a hard time finding winning stocks due to an uneven legal landscape in the United States and worldwide.
Pot stocks could be speculative until the cannabis industry matures a bit. Still, these three stocks have shown an ability to execute their business model, and the marketwide correction has beaten them down significantly from their highs. Check out these three potential pot winners as top ideas for February.
1. GrowGeneration
Growing cannabis requires supplies, fertilizers, and equipment, which gardening company GrowGeneration (GRWG) specializes in as the largest hydroponic supplier in the United States. The company keeps expanding its store footprint, and now has 62 locations across 13 states.
Image source: Getty Images.
Retail is highly competitive, but GrowGeneration's focus on cannabis farming has given it the pricing power with suppliers, product selection, and specialization to attract growers to its stores. Sales through the first nine months of 2021 were $332 million, more than the company did in 2019 and 2020 combined, with EBITDA (earnings before interest, taxes, depreciation, and amortization) guidance between $31.5 million and $33.5 million.
The marketwide sell-off of pot stock shares and a dramatic slowdown in same-store sales in the 2021 third quarter pushed the stock from $67 per share to $8 within the past year. But the company's slowing sales may have more to do with a supply glut in crucial states than a real slowdown in the business.
Meanwhile, the long-term prospects of the cannabis industry should lift GrowGeneration if the company can keep executing on its store development as more states legalize pot. The stock's market cap is just $500 million right now, leaving a lot of room for GrowGeneration to expand.
2. Cresco Labs
Companies are trying to create consumer-facing brands in this new industry, including multi-state operator Cresco Labs (CRLBF -4.76%), a vertically integrated business that touches multiple aspects of cannabis from farm to retail. It grows and manufactures cannabis and sells it both through wholesale channels and under its brand names in its own retail locations in several U.S. states.
Cresco Labs has seen solid revenue growth. Sales in the third quarter of 2021 increased 40% year over year to $215 million, and the business is profitable, doing $56.4 million in EBITDA in the quarter. The company has invested in acquisitions to help grab market share, including buying Florida cultivator Bluma Wellness, Cultivate in Massachusetts, and Laurel Harvest and Cure in Pennsylvania. These acquisitions help give the company fast-track access to more retail licenses as states legalize.
Marijuana stocks have been impacted across the board by the market's recent pullback, and at $7 per share, Cresco Labs now trades at a market cap of just over $1.8 billion and a price-to-sales ratio of just over 2. As with GrowGeneration, revenue growth seems strong, and the company is generating positive EBITDA, which means it's profitable before factoring in non-cash adjustments. The cannabis sector is highly competitive, but Cresco could have long-term upside from this valuation if it continues executing.
3. WM Technology
Investors can benefit from the growth of the pot industry without directly investing in businesses that grow it. WM Technology (MAPS -2.63%) is a software company with tools for retailers and consumers alike. Its consumer platform, called Weedmaps, lets people shop for cannabis products and have them shipped directly to their homes. In an industry that's still so fragmented, this can dramatically improve consumers' buying experience. The seller platform includes online ordering, loyalty programs, and point-of-sale tools.
It's essential to stay on top of regulatory issues when working in an industry as legally sensitive as cannabis is. WM Technology had to cut off services to many Canadian sellers in the second half of 2020, mainly because they didn't have the proper paperwork. This suppressed the company's growth in 2021, resulting in a revenue increase of just 9% year over year in the third quarter. This might scare investors, but I think it's important to focus on the U.S. business, which grew 46% year over year. And as the company moves into 2022, the year-over-year comparables will leave out 2020 and paint a more accurate picture for investors.
The company came public via a merger with a SPAC (special purpose acquisition company). Many SPAC stocks have sold off dramatically, only adding to the pain that smaller growth stocks have endured throughout the past several months. But WM Technology is growing its U.S. business at 46%, and the company is EBITDA positive, earning $10 million in the third quarter.
If investors can look past the inconsistent growth, WM Technology could be poised to generate strong returns if future quarterly results begin to convince the market of the strength of company's fundamentals. Its market cap is just $644 million, and the stock trades at a price-to-sales ratio of less than 2.
