3 Undervalued Cannabis Stocks With Sky-High Return Potential

Stocks to buy

AdvisorShares, the company managing the world’s largest hemp exchange-traded fund Poseidon Dynamic Cannabis ETF (NYSEARCA:PSDN), has reported a waning interest in cannabis stocks. The cannabis industry in the U.S. faces harsh realities of supply surplus, declining wholesale prices, stricter regulations, and distribution challenges. However, where crisis dawns for some, opportunities can emerge for others.

In November 2021, the PSDN fund was launched on the New York Stock Exchange, including shares of leading cannabis companies. However, the fund did not garner trader interest, leading to an immediate decline in its shares. Since listing, their value has plummeted by 90%, currently hovering below $1.

According to recent data from Green Market Report, only three of the largest public cannabis enterprises in the U.S. managed to generate profits last year, totaling $36.5 million. In contrast, the remaining 21 companies collectively suffered massive losses of $4 billion. Leading cannabis producers weren’t exempt from this trend, as Tilray (NASDAQ:TLRY) stocks declined by 91% from their October 2018 peak, Aurora Cannabis (NASDAQ:ACB) shares fell nearly 97%, and Canopy Growth’s (NASDAQ:CGC) assets plummeted by 98%. Consequently, the waning investor interest in the cannabis industry is fueled by significant losses incurred.

On the flip side, positive developments on the horizon could reverse the decline of cannabis stocks. For instance, Germany recently unveiled plans to legalize recreational marijuana use in the country. Aurora Cannabis could capitalize on this opportunity, having already obtained EU-GMP certification for its modern medical cannabis production facility in Germany.

Let’s take a look at three cannabis stocks that could be part of this reversal.

Canopy Growth (CGC)

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Canopy Growth (NASDAQ:CGC) stocks have displayed their poorest performance, falling around 85%, yet signs of a potential turning point are visible. The company is focusing on the U.S. cannabis market and implementing cost-cutting measures to bolster profits. The growing legalization of cannabis in the U.S. and the potential enactment of the SAFE Banking Act could favor Canopy Growth.

In Q1 of the 2023 fiscal year, net revenue increased by 3% compared to the same period in the previous year, totaling $109 million. Over the 2022 fiscal year and Q1 of 2023, net revenue rose by 16% compared to the corresponding periods in the previous year. Total cost savings of $172 million were achieved during Q1 of the 2024 fiscal year.

Tilray (TLRY)

Source: Ralf Liebhold / Shutterstock.com

Similar to Canopy Growth, Tilray (NASDAQ:TLRY) hasn’t exhibited impressive financial results in cannabis production. This led the company to diversify its business, trimming incurred expenses. Currently, Tilray also operates in the alcohol and non-alcoholic beverages segment, which is performing relatively well.

By strategically acquiring a series of enterprises, Tilray has solidified its position as a key player in the Canadian cannabis sector. Beyond its prominence in the cannabis and beverages sector, Tilray has extended its influence into two additional sectors: wellness, featuring hempbased productsand pharmacy. While Tilray has made noticeable strides in its financial performance, the journey towards optimization continues. In the fiscal year of 2023, the company experienced a marginal decline in revenuefalling by less than 1to $627 millionHowever, a remarkable upward trend was witnessed in the company’s profit, surging by 26% on an annual basis. This growth can be attributed to effective cost-cutting measures that have positively impacted the cost of products sold.

Tilray’s acquisition of eight beer brands from Anheuser-Busch InBev (NYSE:BUD) sparked positive market activity. Tilray’s stock prices surged around 20in a single day. This acquisition positions Tilray to leverage AnheuserBusch’s networks for competition in the U.S. market, extending to partner distributors. The purchase signifies Tilray’s earnest ambition to rank among the top 10 U.S. brewers by revenue. Such a business expansion makes it a reliable market contender and a potential generator of cash flow in the short-term future.

Cronos Group Inc. (CRON)

Source: Shutterstock

Cronos Group Inc.’s (NASDAQ:CRON) stock recently experienced a decline following the announcement by the Canadian cannabis company that it is currently evaluating interest from potential buyers. However, these discussions occurred to be in their preliminary stages. Reports indicate that potential buyers include Curaleaf Holdings (OTCMKTS:CURLF), a prominent U.S. cannabis firm, and the tobacco giant Altria (NYSE:MO). It’s worth noting that Altria already possesses a significant stake of 41% in CRON stock, a result of its $1.8 billion investment back in 2018.

In light of these unconfirmed discussions, CRON’s value fell by 0.6% in regular trades, despite broader equities market gains. This potential deal coincides with a broader trend of consolidation in the Canadian market, where supply has outpaced demand for cannabis, causing a decline in stock prices across the sector. A confirmed merger could provide a supportive boost to stock growth. Currently, CRON stock is down 26% in 2023.

On the date of publication, Julia Magas did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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