3 Cannabis Stocks to Consider Buying as HHS Recommends Easing Restrictions on Marijuana
Cannabis stocks have been on an absolute tear in recent trading sessions. Last week, the U.S. Department of Health and Human Services (HHS) announced it would recommend that the country’s Drug and Enforcement Agency (DEA) downgrade marijuana from the Schedule I list for controlled substances to Schedule III.
If cannabis is downgraded to a Schedule III drug, it would mean the U.S. government no longer views it as a drug with high abuse potential - and it would give the marijuana industry more latitude to undertake clinical research for medical usage, as well as making tax structures more favorable for cannabis corporations.
While the DEA's final ruling may take some time, a Schedule III shift for the U.S. market would no doubt result in another major burst of momentum for cannabis stocks. The U.S. is already the world’s largest market for cannabis, and legacy marijuana producers would gain access to traditional sources of funding to fuel their expansion plans and meet rising demand, as well as the prospect of far more favorable tax legislation.
Given these factors, here are three cannabis stocks you can consider buying today, with analysts tracking the shares expecting significant upside from all of these names over the next 12 months.
Canadian cannabis producers, including OrganiGram Holdings (OGI), have burned significant investor wealth in the last five years. Canada legalized the recreational use of marijuana in October 2018, after which cannabis producers increased manufacturing capacities at an accelerated pace. However, the slow rollout of retail stores in Canada, rising competition, and cannibalization from the illegal market resulted in an oversupply of marijuana products, driving profit margins lower and inventory levels higher.
Shares of OrganiGram peaked just shy of $34 back in May 2019, but now trade around $1.51.
Analysts tracking OrganiGram expect the company’s sales to increase by 5.7% to $113.3 million in fiscal 2023 (ending in August) and by 5.8% to $119.5 million in fiscal 2024. While the Canadian market has several marijuana producers, OrganiGram is betting on international growth to drive future sales. It continues to grow its list of international business partners, and is actively pursuing opportunities in this segment.
In March, OGI invested $4 million in Green Tank Technologies, a U.S.-based company. The investment provides OrganiGram access to a new vaporization technology that will be exclusively available for its products for 18 months post-commercialization.
OrganiGram has invested in several cost-cutting capex projects, which should result in annualized savings of $7 million. It has internalized testing requirements and decreased drying times while automating its SHRED packaging, lowering the cost structure significantly.
Out of the four analysts tracking OGI, three have a “strong buy” recommendation, and one recommends “hold.” The average price target for the stock is $3.12, which is more than 106% higher than current prices.
Another Canada-based marijuana producer, Cronos Group (CRON), has focused on launching innovative products, improving profit margins, and driving efficiencies in operating expenses this year.
Cronos exited U.S. CBD operations in Q2, allowing it to reduce costs and focus on recreational and cannabis markets. It also disclosed plans to exit its Manitoba facility by the end of 2023. The company expects to save between $20 million and $25 million in operating expenses this year, with incremental savings forecast at between $10 million and $15 million in 2024.
However, net sales fell by 12% year over year to $19 million in Q2, and the company withdrew its full-year revenue guidance. Cronos attributed the top-line weakness to lower cannabis flower sales in Israel, plus an adverse price mix shift in Canada’s cannabis flower segment. With $841 million in cash, Cronos has some room to sustain its cash burn rates and turn profitable, given it reported an operating loss of $12.3 million in Q2.
Out of the 11 analysts tracking CRON, three have a “strong buy” recommendation, seven recommend “hold,” and one recommends a “moderate sell.” The average price target for the stock is $2.76, which is 35% higher than current levels.
The final cannabis stock on our list is GrowGeneration (GRWG), valued at $196 million by market cap.
GrowGeneration increased net sales by 12% to $63.9 million in Q2, even as comparable store sales were down 15%. Due to an inflationary environment, gross margins fell by 26.8% from 28.5% in the year-ago period. Adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) arrived at $0.9 million, and GrowGeneration ended the quarter with $70.6 million in cash.
The company forecasts sales between $220 million and $225 million in 2023, with adjusted EBITDA losses estimated between $4 million and $6 million. GrowGeneration is on track to reduce losses per share from $2.69 in 2022 to $0.33 in 2024.
Out of the six analysts tracking GrowGeneration stock, four have a “strong buy” recommendation, and two recommend “hold.” The average price target for the stock is $4.84, which is 50.7% higher than current prices.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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