Despite an unfavorable macroeconomic situation and cannabis' legal ambiguity in the U.S. market, cannabis stocks demonstrated remarkable resilience in August. Several positive developments, such as the steady progress of the SAFE Banking Act -- which could open up financial services to cannabis companies -- in the U.S. Senate and the possible reclassification of marijuana by the federal government, improved investor sentiment and propelled some of the most prominent players in the space higher last month.
Although political and regulatory hurdles facing the industry are still unresolved and marijuana stocks are likely to be highly volatile as a result, the undeniable momentum building within the legalization movement could spark a recovery for several of the industry's biggest laggards in September and beyond.
Here are three undervalued pot stocks that stand out as appealing turnaround candidates right now.
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Curaleaf: A top MSO with an international footprint
Curaleaf (CURLF 5.26%) is a U.S.-based multi-state operator (MSO) with a presence in 20 states, 22 cultivation sites, and over 152 retail locations. Curaleaf has also been expanding its footprint internationally through strategic acquisitions in recent years, such as the landmark deal to buy EMMAC Life Sciences in 2021, along with its decision to purchase a 55% equity stake in Germany's leading medical cannabis company, Four 20 Pharma, in late 2022.
As a result of these deals, Curaleaf has amassed a substantial commercial presence in Europe, a market estimated to be worth up to $248 billion in annual cannabis sales. With a proven ability to expand in a challenging operating environment, a top-tier share of the U.S. cannabis market, and a growing international presence, Curaleaf stock could be poised for a healthy rebound after its stock lost over 40% of its value over the prior 12 months and as legalization momentum builds.
Cresco Labs: Time to buy the dip
Cresco Labs (CRLBF 5.13%) is another leading MSO in the cannabis industry. It has a presence in nine states, operates 69 dispensaries, and dominates the wholesale market for cannabis products in several regions. Cresco Labs specializes in growing high-quality cannabis flower and making premium extracts and concentrates. The company also has a strong brand portfolio and a loyal customer base across various product categories such as flower, concentrates, and vapes.
Despite its solid performance and expansion strategy, Cresco Labs' stock has plummeted by nearly 60% in the last 12 months. Investors dropped the stock due to the bear market in growth equities, along with management's decision to nix a planned megamerger with Columbia Care. However, this sharp pullback could be a great chance to invest in a top growth stock at a bargain price, considering its long-term potential.
Tilray Brands: A potential hidden gem
Tilray Brands (TLRY 1.71%) is the result of the 2021 merger between Tilray and Aphria, two of the largest Canadian cannabis producers. The combined company is now one of the biggest cannabis companies in the world by revenue, with operations in multiple countries and a vast portfolio of leading brands. Tilray Brands has a dominant position in the Canadian cannabis market, with a 13% market share as of July. The company has a particularly strong presence in the international medical market, especially in Germany. Tilray Brands is also pursuing growth opportunities outside of cannabis, primarily through its expansion into craft beer and spirits.
Since closing its merger with Aphria, Tilray Brands stock has shed over 80% of its value.
The company has been stung by the burdensome regulations in its home country, the slow pace of legalization in key international markets like the U.S. and Germany, as well as a general aversion to growth equities during the 2022 bear market. The company's stock, though, could be a hidden gem. Tilray Brands has proven to be a shrewd operator and its plans to lean on alcoholic beverages during the initial stage of cannabis legalization should allow it to outlast most of its Canadian peers.
What makes these pot stocks stand out?
The cannabis market is crowded with many players, but not all of them are equally attractive. These three companies stand out from the broader field due to their proven ability to expand in a tough operational environment, their ability to capture a large share of key segments, and their ability to create brands that resonate with customers.
These are essential qualities in the nascent cannabis industry, especially as it faces regulatory uncertainty in the United States. In other words, these three pot stocks should have what it takes to survive until the politics of cannabis become a tailwind -- not a stumbling block -- for the industry.
