With the AdvisorShares Pure US Cannabis ETF falling by nearly 60% in the last 12 months and the S&P 500, representing the wider market, buckling nearly 10%, it's clear that the challenging macroeconomic outlook is especially harsh for high-growth industries like cannabis. To complicate matters, these bearish conditions are occurring at the same time as general turmoil in the cannabis industry wrought by an oversupply of marijuana products and numerous companies struggling to become or remain profitable.
Nonetheless, there are a couple of cannabis growth stocks that should certainly survive the headwinds affecting their underlying businesses and returns. That doesn't mean these two will outperform the market anytime soon -- because they probably won't -- but it does mean there's potentially an opportunity for daring investors to load up on shares while things are looking grim.
1. Tilray
After falling by more than 73% in the last 12 months, the market does not seem to be optimistic over Tilray Brands (TLRY 1.71%) stock. But with $415.9 million in cash and a trailing 12-month revenue of $628.3 million, it won't have much of a problem covering its operating expenses, which totaled $366.6 million last year, so its survival isn't in question. What's more, it could soon get its chance to more fully exploit the cannabis market in the E.U. This summer, several European countries, including Germany, Malta, and Luxembourg, made early political moves to pave the way for recreational cannabis legalization.
On Sept. 6, management announced that it had held a policy roundtable meeting about legalization with German regulators. That's big news for Tilray, as its footprint in the E.U. is already quite substantial. It has some of its major cultivation and production facilities located in Portugal, and several subsidiaries set up to access the medicinal cannabis markets in Germany, Poland, and Italy. Right now, it has a 20% share of the German medicinal market, so its distribution operations are likely built up enough to transition quickly to recreational sales.
Furthermore, to my knowledge, no other multinational cannabis business is positioned for E.U. legalization as thoroughly as Tilray. That means it won't need to fight competitors for market share for a good while after any regulatory changes, which in turn suggests that it'll be able to grow even more rapidly -- and perhaps with better gross margins -- than in its home market of Canada.
So the longer the bear market stretches on, the higher the chances it'll get a pretty beefy consolation prize. Still, it isn't a stock that's a good investment for everyone. With only a trio of profitable quarters in the last three years, its earnings are very far from consistent. If you're comfortable with taking a significant risk on its share price turning around after legalization in the E.U. -- assuming it happens at all, which, as shown by regulations in the U.S., isn't a sure bet -- it could be a good purchase, but it's not something for those who are risk-averse.
2. Cresco Labs
Down 43% in 2022 so far, Cresco Labs (CRLBF 5.13%) is another heavily bruised cannabis growth stock, but don't write it off just yet. Despite being unprofitable and its top line only growing by 4% year over year in the second quarter, reaching $218 million, things are looking up. It's about to make a transformative acquisition of the company Columbia Care that'll give it access to more than 70% of the addressable cannabis market in the U.S.
The deal is for around $2 billion in stock, and it's expected to close sometime in the fourth quarter of this year. When the transaction closes, Cresco will be the largest multi-state operator (MSO) in the U.S., with a span of 18 state markets and its annual revenue predicted to be around $1.4 billion. And at that point, it'll also have a leading share in many of the country's fastest-growing markets.
Much like Tilray, Cresco Labs isn't a stock for the faint of heart. The acquisition won't make it profitable overnight, and management hasn't given any estimates for how much cost synergies the deal could generate. Relatedly, its debt load of $632.5 million might eventually become a problem.
But if you're willing to bet that it'll be able to translate its favorable market positioning into profitability and actual earnings in the next few years -- which would be a departure from its gently declining gross margin over the last three years -- it could still make sense to buy a few shares. Just remember: It's one thing for a company to survive a bear market, and it's another for a company to thrive.
