Written by Aditya Raghunath at The Motley Fool Canada
Cannabis stocks have been on an absolute tear in recent trading sessions on the hope that marijuana will be declassified as a Schedule I drug and even decriminalized at the federal level in the United States. Shares of TSX cannabis stocks such as Canopy Growth (TSX:WEED) and Aurora Cannabis have surged almost 200% and 80%, respectively, since late August.
Investors are optimistic that the push towards decriminalization and eventual legalization will allow Canopy Growth and other domestic licensed producers to gain traction in the U.S., which is the largest marijuana market globally.
However, Canadian marijuana companies continue to wrestle with a range of structural issues from high inventory levels to low profit margins and billion-dollar losses. In the last four fiscal years, Canopy Growth has reported cumulative operating losses of almost $3 billion, driving its share prices 98% below all-time highs.
Alternatively, multi-state operators in the U.S. are shoring up their profit margins and are positioned to benefit from economies of scale, especially if marijuana legalization gains pace. Here are two such cannabis stocks to buy over Canopy Growth today.
Green Thumb Industries stock
Valued at a market cap of $3.5 billion, Green Thumb (CNSX:GTII) stock is up 65% in the last two weeks. Green Thumb primarily focuses on limited-licence markets in the U.S., where the competition is limited to a few players. This model has allowed it to build a customer base and improve the bottom line.
In fact, Green Thumb has reported a positive GAAP (generally accepted accounting principles) for 11 consecutive quarters, which is not the trend for other marijuana producers.
Green Thumb reported sales of US$252 million in the second quarter (Q2) and a GAAP net income of US$13 million, or US$0.05 per share. Its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) stood at US$76 million, indicating a margin of 30%.
Its operating cash flow stood at US$93 million, and the company ended Q2 with US$149 million in cash. Green Thumb opened six Rise retail stores in the quarter and is forecast to increase sales by 18% to $1.36 billion in 2023.
The top line is also estimated to increase by 16.3% to $1.6 billion in 2024. Comparatively, analysts expect adjusted earnings to improve from $0.44 per share in 2022 to $0.57 per share in 2024, despite a challenging macro environment.
Priced at 2.2 times forward sales and 25.6 times forward earnings, GTII stock is quite cheap. It trades at a discount of 100% discount to consensus price target estimates.
Curaleaf (TSX:CURA) trades at a market cap of $4.8 billion, and the stock is also up 64% since the last week of August. Similar to Green Thumb, Curaleaf, too, is a multi-state operator with a presence in 20 states.
Equipped with 22 cultivation sites and 152 retail outlets, Curaleaf is targeting international expansion on the back of strategic acquisitions. For instance, in Q4 of 2022, Curaleaf inked a deal to purchase a 55% equity stake in Four 20 Pharma, the leading medical cannabis company in Germany.
Annual sales in Europe are estimated at US$248 billion, providing Curaleaf to fuel sales growth in the upcoming decade, given it ended 2022 with $1.77 billion in revenue.
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