2021 was a dreadful year for marijuana stocks. The industry benchmark, the Horizons Marijuana Life Sciences ETF, dipped 54% compared to the S&P 500‘s gain of 20%.
However, that doesn’t mean the sector is doomed and all hope is lost. Smart investors are aware that highs and lows are common in an evolving industry. The sector took a hit last year because of the lack of positive movement toward the federal legalization of marijuana. But there is no stopping this industry’s growth, which is expected to double by 2025.
Though I am not in favor of the Canadian pot stocks (except Tilray), which might take a few years to rebound, U.S. cannabis companies continue to impress with their outstanding financials and expansion strategies. These growth stocks are an excellent addition to one’s portfolio to earn long-term returns.
Let’s take a look at why 2022 is not the time to give up on marijuana stocks.
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Ample growth opportunities for pot growers
Investors are skeptical of investing in marijuana stocks, wondering if federal legalization will ever happen. But even without that, the domestic multistate operators have a lot of room to grow as state legalization continues. The sector offers some remarkable growth stocks that could touch new highs as the industry matures.
Trulieve Cannabis (OTC:TCNNF) started as a small medical cannabis company in Florida but is now dominating the Sunshine State with 112 dispensaries. It is slowly spreading its roots to other key cannabis markets, operating 159 dispensaries nationwide. The Harvest Health acquisition (completed in October 2021) gave it access to the Arizona, Pennsylvania, and Maryland cannabis markets.
While profitability is still a challenge for some cannabis companies, Trulieve made profits for 15 consecutive quarters, and that too was just from medical cannabis companies. The company is slowly now dipping its toes into the recreational markets as well.
In its recent third quarter, net profits of $19 million showed 7% year-over-year growth. A 64% year-over-year revenue growth of $224 million in the quarter contributed to that. Trulieve expects full-year revenue to come in the range of $815 million to $850 million and adjusted EBITDA to be in the range of $355 million to $375 million. Note that this excludes the revenue from Harvest. Trulieve could easily generate close to $1 billion in revenue this year.
Massachusetts-based Curaleaf Holdings (OTC:CURLF) is also aggressively expanding to rise to the top of the list of the biggest cannabis players in the country. Its timely and smart acquisitions in the last two years are driving its revenue growth. In its third quarter, revenue surged 74% year over year to $317 million. Adjusted EBITDA for the quarter also came in at $71 million versus $42 million in the year-ago quarter.
Recently, the company acquired Bloom Dispensaries, which increased its store count to 16 in Arizona and 128 nationwide. It was smart of Curaleaf to expand to the Arizona market, which recently legalized recreational cannabis. Curaleaf also feels well prepared with three dispensaries for the New Jersey market, where recreational sales are expected to begin in the first quarter of this year.
Adding to its revenue growth is also exposure in the burgeoning European market, which is expected to grow at a compound annual rate of 29.6% through 2027 to $37 billion.
The company expects to cross $1 billion in revenue for the full year, coming in at the lower end of the range of $1.2 billion to $1.3 billion. It’s not profitable yet, but with this level of drastic revenue growth, profitability isn’t far along.
Illinois-based Cresco Labs (OTC:CRLBF) and New York-based Columbia Care (OTC:CCHWF) might be smaller in size, but some of their smart strategies are helping them grow at a drastic rate. Both companies target limited-license markets that are restrictive of how many licenses they offer to each cannabis grower. This strategy has helped both grow a loyal customer base that is also boosting their revenues. In the third quarter, Columbia Care’s top line grew 144% year over year to $132 million, with EBITDA jumping a dramatic 634% to $31 million from the year-ago period.
Columbia Care operates 131 facilities, 99 of which are retail stores. It has a vast presence in some of the key cannabis markets that are growing at an outstanding rate. It also is expanding to Colorado and the Mid-Atlantic through smart acquisitions of Green Leaf Medical and Colorado-based Medicine Man.
Meanwhile, Cresco, with just 47 stores nationwide, is catching up to the bigger players. In its Q3, total revenue surged 41% year over year to $215 million, with adjusted EBITDA of $56 million, compared with $40 million in the year-ago quarter. Cresco expects to end the year strong, with revenue in the range of $235 million to $245 million, an adjusted EBITDA margin of 30% for 2021, and a gross profit margin above 50% for the rest of 2021.
Note that these companies managed to grow to this extent even in a limited legal market. Industry experts predict close to seven states could legalize marijuana this year, with possibilities including Maryland, Missouri, Oklahoma, Ohio, Arkansas, Pennsylvania, and Florida.
The opening of new markets gives these companies ample opportunities to solidify their footprint even before federal legalization happens. If and when that happens, they will be in a position to dominate the market then and give a tough fight to their Canadian counterparts, which are very keen to enter the U.S. markets.
Expect these pot stocks to jump 150% to 200%
All four stocks are down more than 45% in the last 12 months. However, if state legalization continues to ramp up, these pot stocks could skyrocket again. And whether federal legalization happens or not, analysts see whopping upsides of 160%, 226%, 161%, and 220% for Cresco, Trulieve, Curaleaf, and Columbia Care’s stock over the next 12 months.
TCNNF PS Ratio data by YCharts
That said, as marijuana is a risky sector, risk-averse investors should diversify their portfolios with some safe stocks from different sectors while starting a small investment in these outstanding pot stocks.
Trading at a price-to-sales ratio (P/S) ratio between 2 and 4, these stocks are cheap right now. However, pot stocks won’t be this cheap if more states start legalizing marijuana this year. So you may want to take advantage of the dip and buy now.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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