Cannabis stocks have been on an absolute tear in recent trading sessions as there is a chance for marijuana to be decriminalized in the U.S. at the federal level. Moreover, investors believe the eventual push toward cannabis legalization in the U.S. will help licensed marijuana producers unlock additional revenue streams in the upcoming decade.
However, investing in cannabis stocks can be quite tricky. For instance, in the last five years, Canadian pot stocks, including Canopy Growth (TSX: WEED) and Aurora Cannabis, have burnt massive investor wealth due to mounting losses.
Canada legalized cannabis for recreational use in October 2018, after which licensed producers went on an expansion spree. Canopy Growth and its peers increased manufacturing capabilities and acquired companies at a hefty premium. However, they overestimated demand and had to combat cannibalization from the illegal as well as rising competition.
These structural issues resulted in lower profit margins, goodwill write-downs, and the shutdown of production facilities. Moreover, due to consistent losses, Canadian cannabis stocks had to raise equity capital multiple times, diluting shareholder wealth significantly.
Comparatively, marijuana companies south of the border are in a much better position financially. Here are two such cannabis stocks you should buy instead of Canopy Growth right now.
Is Green Thumb Industries stock a good buy?
A multi-state operator, Green Thumb Industries (CNSX: GTII) has 84 retail stores in 15 markets in the U.S. While most other cannabis producers are reporting billion-dollar losses, Green Thumb recorded its 10th consecutive quarter of GAAP (generally accepted accounting principles) net income in the second quarter (Q2) of 2023.
In the June quarter, Green Thumb reported sales of US$252.4 million, net income of US$13.4 million, and operating cash flow of US$93 million. It continues to invest heavily in capital expenditures as the company aims to expand its retail footprint. In the last two years, its capital expenditures have totaled close to US$370 million.
The state of Maryland recently legalized recreational sales of cannabis, which should be a key driver of sales for Green Thumb in the second half of 2023. Green Thumb has four retail stores in the state, which recorded adult-use cannabis sales worth US$87.4 million in July.
GTII is forecast to improve adjusted earnings from US$0.05 per share in 2022 to US$0.24 per share in 2024. The stock currently trades at a discount of 40% to consensus price target estimates.
What is the target price for Curaleaf stock?
Valued at a market cap of $3.2 billion, Curaleaf (CNSX:CURA) has more than 150 retail outlets in 19 U.S. states, providing it with the potential to gain traction in several growth markets. In Q2 of 2023, Curaleaf increased sales by 4% year over year to US$339 million. While the company remains unprofitable, it should narrow losses from US$0.52 per share in 2022 to US$0.12 per share in 2024.
Curaleaf also has the opportunity to grow its top line by expanding in international markets, including Europe. Trading at 2.4 times forward sales, CURA stock is not too expensive, especially if it can report consistent profits by the end of 2025.
The cannabis giant trades at a discount of 24% compared to consensus price target estimates.
