Some investors may be skeptical of a bear market. Yet, savvy investors recognize this as an excellent investment opportunity. Despite having strong fundamentals, the majority of growth stocks have underperformed this year.
Cannabis stocks, in particular, have been on a roller-coaster ride for some time. Investors avoided marijuana stocks due to the lack of progress toward federal legalization. However, those with patience and a healthy risk appetite can benefit greatly from investing in cannabis stocks. Let's look at two such growth stocks that are down more than 70% this year but have excellent long-term prospects.
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1. Cresco Labs: An up-and-coming cannabis force
Cresco Labs (CRLBF 1.51%) isn't a popular name in the cannabis industry yet, despite generating $822 million in revenue in 2021. It could be because it only operates 55 stores in seven states, compared to Curaleaf Holdings, which operates 145 stores in 21 states. It also hasn't dominated any state market the way Trulieve Cannabis (TCNNF 0.41%) has.
According to management, Cresco's focus on long-term profitability, such as the closure of underperforming facilities, had an impact on the quarterly results. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) fell to $41 million in the most recent quarter, down from $56 million the previous year, with revenue falling 2% to $210 million.
But, what's impressive is despite having 55 stores, Cresco Labs is catching up to its peers in terms of revenue. Last year, Trulieve earned $938 million, while Curaleaf earned $1.2 billion.
Cresco expects to complete its acquisition of Columbia Care by the close of the year. The acquisition will boost its portfolio by 130 dispensaries. Joining forces with Columbia could propel it to the forefront of the industry.
2. Trulieve Cannabis: Florida's top player
With over 120 dispensaries in Florida alone, Trulieve Cannabis is a dominant cannabis player in the state. Investors worried that Trulieve's strategy of concentrating its efforts solely on the state market might be a bad idea. However, this has worked in the company's favor. In the past, the company has been profitable simply by establishing a strong presence in its home state. Trulieve can be profitable again now that it has 178 stores in 11 states.
Despite a 34% increase in revenue to $301 million year over year, the company recorded a net loss of $115 million in the third quarter of 2022. Management attributed this loss to the closure of dispensaries in California and some wholesale operations in Nevada.
The company ended the quarter with $114 million in cash and is continuing to aggressively expand. It anticipates full-year revenue in the $1.25 billion to $1.30 billion range. If the upper end of the guidance is met, it would represent a 39% increase year over year.
New state markets could boost sales for both companies
Pennsylvania, the country's fifth-most populous state, could be another hot cannabis market. With Democrats taking over the State House next year, hopes for recreational cannabis legalization are rising. Approximately 66% of registered Pennsylvania voters support recreational marijuana legalization.
Neighboring states like New York, New Jersey, and Maryland are already reaping the tax benefits from adult-use sales. This factor may persuade Pennsylvania to legalize marijuana soon. Though it is far from certain, Cresco Labs and Trulieve Cannabis may profit if this occurs.
Cresco currently operates 10 dispensaries in the state. Meanwhile, Trulieve has 19 dispensaries there.
Trulieve is also working to get recreational marijuana legalized in Florida. The Miami Times reports that Trulieve spent a total of $15 million on a 2024 recreational cannabis ballot initiative that launched in August. If approved, this initiative will allow medical cannabis dispensaries in the state to sell recreational products.
The legalization of marijuana in Florida will be extremely beneficial to Trulieve, the state's dominant player. Cresco also operates 20 dispensaries across the state. When its acquisition of Columbia Care is completed, Cresco's portfolio will include Columbia Care's 14 dispensaries in the state.
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Though federal legalization of marijuana is not in the cards right now, the businesses of these two cannabis companies will boom as more states legalize cannabis in the coming years. The industry is rapidly evolving, with a projected value of $149 billion by 2031. Both stocks are cheap now, trading at a price-to-sales ratio between 0 and 1, which could make them smart buy-and-hold stocks for the long haul.
