Everyone loves a bargain, especially when they're shopping for growth stocks. And thanks to the bear market, there are quite a few contenders that might pop when conditions improve. In particular, there are a pair of cannabis companies that are selling for cheap.
Neither is profitable nor poised to skyrocket tomorrow, but both are valued so low that they could be worth paying attention to anyway, even if they're too risky to warrant an immediate purchase. When the next bull market rolls around, it's possible -- though not guaranteed -- that their shares will be good for investors as money flows back into growth stocks. Here's why.
Image source: Getty Images.
1. Tilray Brands
Tilray Brands (TLRY -4.35%) is working to become the biggest cannabis company in the world, and with annual revenue of more than $628 million in fiscal 2022, it's among the largest already, which is in itself a good reason to add it to your watch list. But the bear market hasn't been kind to it, with shares falling by 52% over the last year. Regardless of its stock price, Tilray has a couple of factors that could work in its favor during the next bull market, starting with its unusual setup for access to the U.S. cannabis market.
Rather than compete in the U.S. cannabis market directly, as some of its competitors do, it maintains several subsidiaries that sell beer. Those subsidiaries have nothing to do with marijuana, but they could enable the company to build its commercial and distribution organizations in advance of federal legalization. Upon legalization in the U.S. (if it happens at all), per the terms of a strategic deal Tilray struck in 2021, it'll gain a 21% interest in a business that's already selling marijuana in there, and when paired with its beer-selling operations, it'll be able to quickly and efficiently secure a sizable portion of the market.
At the moment, however, that favorable chain of events is entirely hypothetical, and the U.S. company that it could gain a stake in, MedMen, isn't profitable or growing, so it would face a few hurdles to success. Still, the possibility of quickly penetrating the massive potential market-to-be could lead to tremendous share-price appreciation if a bull market coincides with marijuana legalization, so it's something investors should be aware of even if the stock isn't a buy at the moment.
Another factor is its valuation, which is dirt cheap. Tilray's price-to-book (P/B) ratio is 0.34, which is among the lowest of all publicly listed cannabis companies. If the company makes the necessary changes and the industry improves, that low P/B could pose a bargain for investors with a high risk tolerance.
2. SNDL
Like Tilray, SNDL (SNDL -2.75%) also sells marijuana and alcohol, and it's based in Canada as well. For SNDL, the most important tailwinds that make it worth paying attention to are that its recently acquired alcohol business is growing rapidly in Canada, as is its cannabis business, which was also recently expanded with a bolt-on acquisition.
Unlike Tilray, SNDL has no aspirations to enter the U.S. market, nor is it angling for dominance in the E.U. Instead, it plans to remain a largely regional Canadian business, leveraging efficient cannabis cultivation operations and its wholly-owned manufacturing, distribution, and retail capabilities to deliver profitable growth and recurring revenue. Over the trailing-12-month (TTM) period, that strategy brought in a total of 494.5 million Canadian dollars, bolstered by major acquisitions of other marijuana companies and organic growth. Its strategy stands in contrast to other Canadian operators like Canopy Growth who are either looking to exit the market or have already done so in hopes of capturing some of the U.S. market's anticipated growth.
And while SNDL isn't anywhere close to being profitable, if it continues to be on the right track when a bull market develops, its shares could rise. More importantly, though it recently scaled back production at one of its cultivation sites in Alberta, it hasn't needed to shut down a significant amount of its capacity to keep the lights on like some of its Canadian competitors. That indicates that it'll likely remain better capitalized and more capable of continuing its pace of acquisitions of other cannabis and alcohol companies as they start to go under or sell off their assets as a result of overbuilt capacity.
In terms of its valuation, SNDL's P/B multiple is 0.35, which makes it among the cheapest of the marijuana businesses out there. Given the ongoing questions about when it'll break even, its low valuation doesn't make it an instant buy, but it does mean that investors should be keenly watching it for any signs of improvement, as its anticipated massive revenue growth would be even sweeter if it were profitable.
So add this stock to your watch list, and keep an eye on how its acquisitions are folded into its operations.
