It’s no secret that new markets, and new industries, offer investors superior return potential. It’s a function of an open field, one in which the high points have yet to be claimed and every move has a greater chance of landing in an advantageous position. One example of this phenomenon is the cannabis industry, and the vistas it has opened for enterprising stock investors.
Cannabis isn’t new – but the legal regime is. Numerous states have been legalizing the plant and its extracts in past decade or more, and while the US has not passed national legalization, Canada has, as have several countries in Europe. The result is an expanding industry, as companies have grown up to take advantages of openings in growing, producing, marketing, and distributing cannabis and cannabis extracts to the medical and adult/recreational sectors.
Taking a look at the US cannabis sector as a whole, Needham’s 5-star analyst Matt McGinley acknowledges the headwinds while foreseeing plenty of growth opportunities.
On the debit side, the most obvious is the fragmented nature of the US cannabis market; without a national legal framework, the industry has to expand state-by-state. And this leads to the biggest credit for the industry, growth. McGinley points out that 37 states have a legalized medical industry, covering as much as 75% of the US population, while 18 states have legalized adult recreational use. McGinley believes that, in the next 2 years, 50% of the of the US population will live in areas with legal recreational use.
“With growth expected across all state regulated programs, we expect US cannabis industry revenue to nearly double by 2026, which provides for a bright growth outlook for public and private operators in the space… In our view, these stocks are undervalued given prospects for exceptional growth that we foresee continuing for 5+ years’” McGinley explained.
From an investor’s perspective, the chance to double your money is usually too good to ignore. We’ve used the TipRanks database to look up the details on two of McGinley’s picks, which he sees with better than 100% upside in the coming year. Each ticker has also received enough support from other Wall Street analysts to earn a “Strong Buy” consensus rating.
Ayr Wellness (AYRWF)
We’ll start with Ayr Wellness, a cannabis company in the health & wellness segment. Ayr produces a line of cannabis products, including smokable flowers, vapes, edibles, and beverages, which are sold through a network of dispensaries – 67 currently, with plans to expand to 95 by the end of this year. The company has over 557,000 square feed of cultivation space in its grow facilities, producing some 100,000 pounds of cannabis biomass.
The company has been expanding its operations, and plans to increase its biomass production to near 300,000 pounds this year. Toward that end, in December, Ayr received approval to start developing a new 86,000 square foot cultivation facility in Arizona. On the retail end, Ayr opened its 43rd and 44th Florida dispensaries in recent weeks, and entered the Pennsylvania market with a dispensary in Bryn Mawr.
Furthermore, during the third quarter, Ayr acquired the cannabis beverage company Levia, and entered a deal to acquire the Herbal Remedies dispensary chain; that deal is expected to close during the first quarter of this year.
The active expansion reflects strong sales growth. Ayr saw the top line in 3Q21 (the most recent reported) grow by 111% year-over-year, to $96.2 million, and the company expects to see a 10% sequential gain in Q4.
Needham’s McGinley selected Ayr as a Top Pick for this year, in part due to the company’s high growth potential.
“Compared to MSO peers, we expect Ayr to have the highest revenue and EBITDA growth in ’22, but the stock trades at the lowest EV/EBITDA multiple in the group. We attribute most of the disconnect between high growth and low valuation to assets under development that will become operational and revenue-generative in ’22. While we see risk to revenue and EBITDA estimates related to timing and productivity ramps, we believe the multiple is low enough that it mitigates downside risk, and think will expand as assets become operational. As such, we see Ayr as one of the most compelling cannabis investments among MSOs, and rate this equity as our top pick for ’22,” McGinley wrote.
In line with his optimistic approach, McGinley gives Ayr shares a Buy rating and his $35 price target suggests an impressive 120% potential upside for the coming year.
Overall, the Strong Buy consensus rating shows that Wall Street is in agreement with the upbeat outlook here; the 5 recent reviews include 4 to Buy and only 1 Hold. Shares are selling for $16.84 and the $38.02 average price target suggests a one-year upside of ~140%.
The next stock we’re looking at, Curaleaf, is one of the cannabis industry’s largest. Even after a year of share price losses – the stock is down 55% from last February’s peak – it still boasts a market cap of $5.5 billion. The company also has one of the industry’s widest distribution networks, with over 117 dispensaries in 23 states, supplied by 25 cultivation facilities with over 4.4 million square feet of grow capacity.
Like Ayr, and the cannabis industry generally, Curaleaf has been growing rapidly. Just in December, the company announced four new dispensaries in Florida, an important move as Florida is the third-most populous state and a major market for legal medical cannabis. Curaleaf also acquired the Natural Remedy Patient Center in Arizona, a deal that cost $13 million and added a tenth location to the company’s network in that state. That was the prelude to Curaleaf’s acquisition of Arizona’s Bloom Dispensaries, a $211 million deal that added another 6 outlets to Curaleaf’s Arizona footprint. The Bloom deal also included over 63,000 square feet of cultivation and processing space in the Phoenix area.
Curaleaf has seen explosive revenue growth over the past two years, with 8 consecutive quarters of top-line sequential gains. In the last quarter reported, 3Q21, the company hit $318.4 million in total revenue, for a 74% year-over-year increase. Cash flow from operations also grew substantially, to $52 million or 15% of total revenue. On a negative note, the company’s net loss deepened greatly, from 1 cent in Q2 to 8 cents in Q3.
McGinley sees Curaleaf poised to further revenue growth going forward, on the back of its successful acquisition campaign. He says of the company: “With an operational footprint in 23 states, Curaleaf has the most breadth among MSOs and with scale building in states likely to express the most growth, we look for it to grow its topline and EBITDA on a multi-year basis. We expect tuck-in acquisitions like Tryke [a November acquisition move -ed.] and Bloom to be typical of the types of assets Curaleaf will pursue in ’22.”
McGinley reminds investors that there are considerable gains in store for Curaleaf in 2022. The analyst rates the stock a Buy, and his $17 price target implies an upside of ~120% on the one-year time horizon.
All in all, this cannabis giant has picked up 11 analyst reviews in recent weeks, including 9 Buys to outweigh 2 Holds for a Strong Buy consensus rating. Shares in Curaleaf are trading for $7.74 and the $18.68 average price target implies ~141% upside from that level.
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