5 Cannabis Stock Favorites as the Battered Sector Battles Back

By some measures, the cannabis industry looks terrible. The average stock in the sector is down 54% year to date and down 83% from the sector high of February 2021, observes cannabis sector specialist Timothy Lutts, editor of Cabot SX Cannabis Advisor and a contributor to MoneyShow.com. As they've collapsed, many cannabis stocks have fallen below March 2020 lows -- while the S&P 500 is up about 77% from then. At the same time, the number of cannabis stocks in the sector has shrunk from 167 stocks back in 2018 to fewer than 90 today, as acquisitions enlarge the industry leaders and delistings eliminate the failures. In many ways, this process reminds me of the collapse of technology stocks after the dot-com bubble that peaked in March 2000. But technology stocks didn't disappear after that bubble; the cream of the crop came back healthier than ever. And so will the best-run cannabis stocks after this downturn is over. Part of the problem today, of course, is that the entire market is down, so much that it's commonly regarded as a bear market. I don't pay much attention to labels. But I do recognize that the trend is down, and I know that it will be hard for this sector to put together a new uptrend until the broader market turns up as well. But I absolutely know that it will -- because the leading companies in the industry, whose stocks we own in our portfolio, have all built solid vertically integrated diversified operations that are either profitable now or will easily turn profitable once managements ease off on the furious growth efforts that have characterized the industry so far. Furthermore, these stocks are now cheaper than ever! My advice is to stay the course. We own the best companies in the business, and until any of them are acquired by larger entities -- possibly well-known giants in the alcohol, tobacco and pharmaceutical industries -- these are the companies whose stocks have the best chance to shine when the sector turns up again. If you're underinvested in the cannabis sector, I think buying some of these stocks here (those rated buy) will work out very well -- but there's no rush. Until we see the sector turn up -- and ideally, the broad market too -- cash is the more sensible option. Today the portfolio is 58% in cash, and that's where it will stay today. Cresco Labs Chicago-based Cresco saw first-quarter revenues of $214 million, as YoY growth slowed to 20%. And the company, which has long prioritized the wholesale market, maintained its position as the #1 seller of branded cannabis products in the U.S. But retail revenue is growing, and was up 44% year over year, to $119 million. The company opened four new stores in the quarter (three in Florida and one in Pennsylvania), and now has 50 stores in 10 states. And when the acquisition of Columbia Care is complete -- Columbia has 84 stores and had first-quarter revenues of $123 million -- the company will have a stronger retail network, which should justify a higher valuation multiple. But as it stands today, this stock remains the portfolio's cheapest on a price-to-sales basis -- just .79. At least one analyst expects to see the company turn profitable in the second quarter, but the stock remains weak, hitting new lows frequently. There's no word on when second-quarter results will be released, but the action of the stock is encouraging; it's been climbing for nearly two weeks and is just crossing above its 25-day moving average. Aggressive risk-takers could buy here. Curaleaf With 131 retail locations in 22 states, Massachusetts-based Curaleaf was the second-largest multistate operator by revenues in the first quarter (just $5 million behind Trulieve), and Cresco's acquisition of Columbia, when completed, will make it a contender, too -- so it's a horse race between those three. But Curaleaf is the clear leader on the perception front; its recent market capitalization of $3.6 billion tells us investors expect a lot from the company and its PSR of 2.8 is the second-highest of our U.S. operators. Some of that is due to its international operations; Curaleaf has operations in eight European countries as well as Israel. Some may be due to the perception that the company's R&D based on rigorous scientific research will pay dividends in the future as the industry goes more mainstream. And some may be due to the company's strong balance sheet -- $243 million in cash at the end of the first quarter. In any case, the future is bright. CURLF is still basically building a bottom -- but it does look like the selling pressure has stopped. Second-quarter results will be released after the market close on August 8. Green Thumb Where Green Thumb stands apart from our first two holdings is its record of posting quarterly profits -- seven in a row so far. But that hasn't helped the stock, which is down 78% from its high of 2021. Headquartered in Chicago, Green Thumb was the third-largest cannabis company in the U.S. in the first quarter (but will fall to fourth after Cresco's acquisition of Columbia is complete), and like the others, it's been growing both organically and by acquisition. The company currently has 77 operating retail locations in California, Colorado, Connecticut, Florida, Illinois, Maryland, Massachusetts, Minnesota, Nevada, New Jersey, New York, Ohio, Pennsylvania and Virginia. It's building a national portfolio of brands that address the customers' spectrum of well-being (from healthy to comfortable to happy). As for the stock, the main trend remains down, though the fact that the stock has recently found support at $9 is a thin ray of sunshine. The stock is working to push above its 25-day moving average. Second-quarter results will be released after the market close on August 3. Organigram OrganiGram is the number three producer of cannabis in Canada, and number one in dried flower, with its flagship brand Edison. And with first-quarter revenues up 117% from the previous year, it's the fastest-growing company in the portfolio -- which is partly possible because it's the smallest. Plus, it turned EBITDA-positive in the first quarter as gross margins improved thanks to economies of scale and increased automation. However, the stock is the weakest in our portfolio by one measure; it's the only one to fall below its 2020 low. But that's mainly because it's Canadian, and the Canadian cannabis stocks have fallen harder than the U.S. stocks as competition has led to unexpectedly low cannabis prices. On the bright side, OrganiGram recently received $6.3 million from British American Tobacco , which increased its equity position to 19.4% and could easily increase that in time. Trulieve While it has long been the biggest seller of marijuana in Florida, where it has a 46% market share and does 70% of its business, Trulieve has been expanding across the country in the past year (it had seven acquisitions in 2021), with the October acquisition of Harvest Health & Recreation (the largest cannabis transaction to date) being the big one. And on June 16, it announced the opening of a new medical dispensary in New Port Richey, Florida, bringing the count to 167 dispensaries in in 11 states, with leading market positions in Arizona, Florida, and Pennsylvania. Trulieve's early focus on Florida led to an impressive 17 consecutive quarters of profitability, but earnings fell into the red the past two quarters as the company expanded aggressively. Still, earnings should return soon, particularly since the company now has the industry's leading footprint in Pennsylvania, and CEO Kim Rivers is optimistic that Pennsylvania (as well as Maryland) will soon legalize recreational marijuana. Speaking of Rivers, it's notable that on May 24, she acquired 14,000 shares of the company at a price of $14.45 a share for a total purchase value of about $202,300. She now owns just under 2.5 million shares. (Investing experts know that insider selling often means nothing -- because executives often need to diversify -- but insider buying is a good sign.) First-quarter results saw revenues of $318 million, up 64% from the prior year (the fastest growth in the portfolio among the U.S. providers as well as the biggest in the industry) -- so growth trends are good. Subscribe to Cabot SX Cannabis Advisor here... https://cabotwealth.com/advisory/cabot-sx-cannabis-advisor/

5 Cannabis Stock Favorites as the Battered Sector Battles Back

Tech stocks didn't disappear after the dot-com bubble; the cream of the crop came back healthier than ever. And so will the best-run cannabis stocks.

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