The cannabis industry is enjoying a resurgence of momentum lately, thanks to two positive developments on the regulatory front. First, the U.S. Department of Health and Human Services suggested in late August that marijuana should be downgraded from Schedule I (no medical value) to Schedule III (drugs with a current medical use) in the Controlled Substances Act. This recommendation signals some progress in the ongoing push for federal legalization of cannabis, although the final decision rests with the Drug Enforcement Agency.
Second, Senate Majority Leader Chuck Schumer (D-NY) has continued to champion the Secure and Fair Enforcement (SAFE) Banking Act, currently under consideration in the U.S. Senate. The SAFE Banking Act, if enacted, would allow U.S. cannabis companies to access banking services and capital markets more easily, thereby facilitating their growth and expansion in this nascent market.
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Here is a brief overview of two marijuana stocks that ought to benefit enormously from this ongoing sea-change in the politics and regulatory status of cannabis inside the United States.
A compelling turnaround story
SNDL (SNDL 3.08%) is a Canadian company that has transformed itself from a struggling cannabis producer to a leading consumer packaged goods and cannabis investment firm in less than three years. This remarkable turnaround was driven, in large part, by two strategic acquisitions: Alcanna in 2022 and The Valens Company in 2023.
Alcanna gave SNDL access to Canada's largest private-sector alcohol retail network, while the Valens deal significantly enhanced SNDL's cannabis product portfolio and operational efficiency. As a result of these transformative deals, SNDL is now on track to achieve profitability by 2024, a rare accomplishment in the highly competitive Canadian cannabis industry.
SNDL stock is also an attractive investment opportunity because of its exposure to the U.S. cannabis market, which is expected to grow rapidly as more states legalize the plant for both medical and recreational purposes. SNDL's investment arm, SunStream Bancorp, allows the company to invest in top-tier U.S. cannabis operators, like Columbia Care, without violating Nasdaq's listing rules. Therefore, SNDL offers investors a way to capitalize on the cannabis legalization trend in both Canada and the United States.
To sum up, SNDL's share price may depend on the volatile cannabis market in the short term. But the company's impressive turnaround -- fueled by its aggressive acquisition strategy -- could eventually become a value-driven growth story.
Wall Street, in fact, believes SNDL's shares are currently undervalued by a noteworthy 66% (based on its average 12-month price target). Now, it's hard to predict the chances of SNDL actually reaching this price target within the next 12 months, but the company's steadily improving fundamentals should have a positive impact on its share performance over the long term.
A leader in the U.S. cannabis market
Verano Holdings (VRNO.F 4.92%) is a leading player in the U.S. cannabis industry, with a presence in 14 states, active operations in 13 states, and 132 functioning dispensaries. The company operates as a vertically integrated producer and retailer of high-quality cannabis products, targeting different segments of the market with its diverse brands.
Some of its well-known brands are Verano, Avexia, Encore, and MÜV, which offer a range of products, from edibles to topicals. The company also differentiates itself with its Zen Leaf and MÜV dispensary concepts, which provide customers with a premium shopping experience.
Verano Holdings stock screens as a buy for several reasons. First, the company has been expanding its footprint in key markets, such as Connecticut, Florida, New Jersey, and Pennsylvania, which have seen strong growth in cannabis demand and sales. In the second quarter of 2023, for instance, Verano reported a 5% increase in revenue compared to the same quarter last year.
Second, Verano is poised to benefit from the ongoing legalization trend in the U.S., which could open up new opportunities and markets for the company. Third, Verano stands out as an attractive takeover target, given its strong brand portfolio, operational efficiency, and the industry's ongoing consolidation.
What does Wall Street think? Analysts covering the stock have a consensus 12-month price on Verano that implies a healthy 79% upside potential from current levels. Under normal circumstances, such a lofty price target would probably come across as wishful thinking. But Verano definitely has the pieces in place to ride the legalization wave higher, and it could very well be bought out for a hefty premium sometime soon.
