While the market has suffered a lot this year, it has been harsh on cannabis stocks after they peaked in the first quarter of 2021. The domestic cannabis companies are doing pretty well and have outstanding long-term prospects. But lack of positive movement toward cannabis legalization has taken a toll on the stock prices.
Most top growth stocks have suffered this year, yet cannabis stocks would probably be investors' last choice to pick in this bear market. But note that this troubled market could be a great opportunity to buy these stocks at bargain prices.
When the industry reaches its full potential, top cannabis stocks like Illinois-based Cresco Labs (CRLBF -4.76%) and Massachusetts-based Curaleaf Holdings (CURLF -2.56%) won't be available at this beaten-down price anymore. Thanks to their smart growth strategies, revenue is surging at a drastic rate. Let's dive into why Cresco Labs and Curaleaf make for good investments now to get richer over the long haul.
Image source: Getty Images.
1. Cresco Labs
Cresco Labs made a power move to acquire a rising competitor Columbia Care now that valuations are low. The acquisition is expected to close by the fourth quarter of this year. Cresco now operates just 51 stores nationally. But with Columbia's assets in its portfolio, it will own more than 130 dispensaries in 18 states.
With just 51 stores, Cresco has already generated $822 million in revenue in fiscal 2021. Peer Trulieve Cannabis, which operates 165 stores nationwide, has reported $938 million over the same period. When the merger comes to fruition, Cresco will be a bigger and better company.
Cresco targets limited-license markets, meaning the state regulators issue licenses to a few select cannabis companies. This strategy allowed Cresco to garner a loyal customer base for its products.
Cresco's revenue in its recently reported Q2 surged 4% to $218 million from the prior-year quarter. It has also been consistently profitable from an operational standpoint. Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) jumped 11% year over year to $51 million in Q2. Cresco ended the quarter with $90 million of cash, which should help fuel its expansion plans this year.
2. Curaleaf Holdings
This multistate operator's consistently strong quarterly performance reveals it is doing everything right. Its recent Q2 results are a testament to that. Curaleaf's revenue grew 8% year over year to $338 million in Q2.
Adjusted EBITDA came in at $86 million in Q2, a jump of 2% over the prior-year period. Curaleaf also generated an operating cash flow of $12 million in the first half of 2022. The company opened seven new stores in Q2, bringing its total to 135 nationwide.
It made some timely and strategic acquisitions that are working well in its favor. Some of these acquisitions include cannabis operators and brands like Select, Curaleaf NJ, Blue Kudu, Remedy, and Grassroots.
Like Cresco, Curaleaf targeted limited-license markets to drive revenue. Further, with the acquisition of Europe-based EMMAC Life Sciences Group last year, Curaleaf has established a strong presence in the European market.
Rebranded as Curaleaf International, it reported a 50% year-over-year surge in revenue in the quarter. The company's management is confident it will achieve revenue targets of $1.4 billion to $1.5 billion in 2022.
Wise growth strategies will make for a smooth road ahead
Mergers and acquisitions (M&A) are pretty common in the cannabis industry. Many small cannabis growers still find it hard to obtain capital because the drug is illegal federally. The bigger players are smart to acquire them, thus minimizing competition. Federal legalization (if and when it happens) will level the road for Cresco and Curaleaf.
Curaleaf expects to close the acquisition of Tryke Companies by Q3, which it believes will contribute fully (around $20 million) to revenue by Q4. This acquisition will allow Curaleaf to have a stronghold in three key growing markets -- Utah, Arizona, and Nevada.
In the recent Q2 earnings call, Curaleaf's CEO discussed how he believes the cannabis business is recession-resistant. I do not think the industry is entirely recession-proof. No doubt, it weathered the pandemic-induced recession pretty well while most industries suffered. Marijuana sales boomed as consumers treated it as any consumer staples product.
Even now when inflation fears have gripped the market, cannabis companies see revenue surging every quarter. There are still market risks involved but these headwinds are short-term and will wane off. The industry is still nascent. It is expected to grow at a compound annual growth rate (CAGR) of 14% to be worth more than $70 million by 2030.
CRLBF PS Ratio data by YCharts. PS ratio = price-to-sales ratio.
With smart M&A and expansion strategies, both Cresco and Curaleaf could soon become the top contenders in the legal cannabis market. Both stocks are cheap now, trading at a price-to-sales ratio between one and three, making it the right time to buy and hold them for the long haul.
