The last 12 months have been brutal for cannabis investors. With the halcyon days of early 2021's marijuana stock surge firmly in the rearview mirror, shareholders have faced staggering losses, even amid rising sales, rising earnings, and ongoing innovation in product offerings and retail experiences.
It's unlikely that such a counterintuitive downturn can continue forever. In fact, I believe that a recovery could potentially occur as soon as later this year. If you're on the fence about whether to invest in marijuana companies, read on, and I'll explain why the industry's near future is going to look a lot better than it's been lately.
Image source: Getty Images.
1. The collapse has left shares of key players looking cheap
Remember when I said that the recent past has been brutal for cannabis stocks? Here's what I mean:
Profitable businesses like Green Thumb Industries (GTBIF -0.18%) and Trulieve Cannabis got hammered just as much as barely profitable or unprofitable ones like Tilray Brands, Curaleaf Holdings, and Cresco Labs. Nor have recent murmurs about the possibility of federal cannabis legalization done much to stem the losses.
On the bright side, this stunning drop has also punctured a hole in inflated valuations, bringing them right back down to earth for what might be an attractive buying opportunity throughout 2022 and perhaps beyond.
Take a look:
TCNNF PS Ratio data by YCharts
For reference, the market's average price-to-sales (P/S) multiple is around three. That makes companies like Jushi Holdings, Cresco Labs, and Trulieve look slightly undervalued. And even when looking at Curaleaf, Green Thumb Industries, and Tilray, they're valued significantly cheaper than they were a year ago. These stock valuations look even better when compared to the heights of early 2019, when, for example, Tilray's P/S was above 50.
Of course, lower valuations are no guarantee that cannabis stocks will bounce back, but they do mean share prices could get some support from value-conscious investors who were loath to pay a pretty penny before.
2. Profitability is rising
Valuations aside, there is another super important trend that gives me hope that cannabis stocks could rebound soon: broadly rising profitability.
Examine this chart:
TCNNF Gross Profit (Quarterly) data by YCharts
Gross profits are rising, in many cases quite rapidly each quarter. At the same time, with the exception of Tilray, total expenses are falling as a share of quarterly revenue. And revenue continues to grow across the board.
Increasing profitability is favorable because it ensures that some companies will be able to self-finance their growth. In the cannabis industry specifically, that's huge, as cultivators often have a difficult time getting access to loans as a result of the federal government's prohibition.
Therefore, it's feasible that revenue growth might even accelerate once some of these businesses are consistently generating positive cash flow, and that'd be a boon for long-term shareholders, to say the least.
