Canada legalized cannabis for recreational use in October 2018, giving rise to investor optimism. But in the last five-and-a-half years, most Canadian marijuana stocks have lost over 90% in market value due to rising competition, negative profit margins, oversupply of products, high inventory levels, overvalued acquisitions, and much more.
Today, the majority of Canadian marijuana producers are wrestling with negative cash flows, making them high-risk investments even at their depressed valuations. Instead, investors should consider increasing exposure to quality pot stocks south of the border to benefit from outsized gains in the upcoming decade.
The marijuana industry in the U.S. is forecast to grow at an annual rate of 14% through 2030, which should allow investors the opportunity to benefit from market-beating returns. Here are two quality cannabis stocks investors can buy right now.
Green Thumb Industries stock
Valued at US$2.9 billion by market cap, Green Thumb Industries (CNSX:GTII) is among the largest national cannabis consumer packaged goods companies in the United States. It owns and operates a chain of national retail stores called RISE Dispensaries. Headquartered in Illinois, Green Thumb has 20 manufacturing facilities in 93 retail locations and operates in 14 U.S. markets.
In the first quarter (Q1) of 2024, Green Thumb increased revenue by 11% year over year to US$276 million. Unlike its peers in Canada, Green Thumb reports a consistent profit ending Q1 with a net income of US$31 million or US$0.13 per share. It reported an adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of US$91 million, indicating a margin of 33%.
Green Thumb is on track to end 2024 with earnings of US$0.26 per share, up from US$0.15 per share in 2023. So, the marijuana stock trades at 48 times forward earnings, which might seem expensive. However, its consistent revenue growth allows Green Thumb to benefit from economies of scale and drive profit margins higher.
Analysts remain bullish and expect GTII stock to surge over 20% in the next 12 months.
Cresco Labs stock
Down 85% from all-time highs, Cresco Labs (CNSX:CL) is valued at US$700 million by market cap. In Q4 of 2023, it reported a GAAP (generally accepted accounting principles) profit of US$4.9 million, primarily due to an industry-leading gross profit margin of 51%. Comparatively, its operating expenses totalled 37% of sales, while the company allocated US$14.3 million towards interest expenses and paid roughly US$8 million in taxes.
In the December quarter, Cresco Labs used US$3.3 million to fund its operating activities, indicating a cash outflow. However, a focus on cost optimization meant that Cresco reported a positive operating cash flow of US$58.6 million in 2023, up from US$18.7 million in the year-ago period.
Moreover, it ended the year with a free cash flow of US$5.8 million, compared to an outflow of US$60.1 million in 2022. A positive free cash flow allows Cresco Labs to fund its expansion plans without having to raise additional capital.
Priced at less than 0.5 times sales, Cresco Labs stock is not too expensive, especially if it can improve profit margins going forward. Analysts remain bullish and expect the stock to surge 10% in the next 12 months.
