The U.S. cannabis market continues to take two steps forward and 1 step back, but the stock market only focuses on the roadblocks. Cresco Labs (OTCQX:CRLBF) is a leading multi-state operator (MSO) trading near new multi-year lows following likely delays to federal legalization. My investment thesis remains incredibly bullish on the stock and the MSO sector.
In not a big shock, but definitely a disappointment, Chuck Schumer (D-N.Y.) has apparently pushed the official release of his comprehensive cannabis reform bill until sometime prior to the August recess for Congress. The Senate Majority Leader had previously pushed for official introduction of the Cannabis Administration & Opportunity Act (CAOA) bill fittingly around 4/20.
Along with delaying the bill release, Schumer again summarized his desire for the legislation as follows:
CAOA will not only remove cannabis from the federal list of controlled substances, but also help repair our criminal justice system, ensure restorative justice, protect public health, and implement responsible taxes and regulations
The law differs from other proposed legislation in the focus on criminal reform and social justice, including restorative justice allowing past marijuana criminals out of jail. A lot of the other deals summarized in this tweet from a cannabis lawyer have major support in Congress, but none of the bills are seen as comprehensive enough for the block of Schumer and Senators Cory Booker (D-N.J.) and Ron Wyden (D-Ore.).
Federal legalization is supported by a large majority of U.S. citizens and even a large swath of Congress with all of these bipartisan approvals of various bills. The biggest sticking point is agreement on the actual legislation with Schumer wanting reform while a lot of Republicans just want a bill removing banking restrictions.
While federal legalization remains a major headache for MSOs, states continue to approve recreational cannabis providing a major catalyst for the companies with licenses in those states. The latest move is New Jersey finally approving the near immediate start of recreational cannabis.
Last week, the New Jersey Cannabis authority approved 13 retail stores for recreational cannabis sales as soon as they meet final inspections. The state approved the following 13 retail stores.
Cresco Labs in the process of acquiring Columbia Care (OTCQX:CCHWF) placing the MSO in a prime position to ultimately benefit from the New Jersey ramp. MJBizDaily predicts the New Jersey cannabis market to reach $700 million this year and top $2 billion, possibly by 2025. For now, the big opportunity is being spread between only 13 retail stores.
The New Jersey Governor announced the start of recreational cannabis could occur on April 21, but so far only Verano Holdings (OTCQX:VRNOF) has announced such a date for launching recreational cannabis sales.
Remember, MSOs needed final approvals from the New Jersey authorities and the stores would need to be stocked with adult-use products for the doors to actually open. Also, the stores will be fined for not providing medial cannabis to approved patients meaning recreational cannabis sale are restricted to only the inventories in excess of medical cannabis products.
Of course, Cresco Labs needs to close the Columbia Care deal to actually benefit from New Jersey cannabis sales. The New Jersey approval is a good sign that New York and other Northeast states will follow suite and actually launch recreational cannabis sales in those states following approval in a path similar to the one followed by New Jersey.
Cresco Labs has a large overlap in assets with Columbia Care likely to require the sales of licenses along with related assets in multiple states. Based on my original research on the merger, the combined company would trade at ~2x 2023 sales targets of $1.7 billion. Naturally, these numbers depend on what assets are spun off and for what prices.
A New York license is the most logical asset sale, but the company has reportedly told analysts to expect divestitures in Florida, Illinois, Massachusetts and Ohio besides New York. The combined cultivation and retail license assets could fetch up to $500 million.
Cresco Labs would be on pace to become the largest cannabis company based on revenues by topping Curaleaf with a $1.5 billion revenue target for 2023, but some significant asset sales in Illinois and other states could cut revenues. Though, New York has limited sales now reducing the impact from unloading one of those licenses while Florida will likely just require the disposal of a license, not the revenue generating stores and cultivation assets.
The key investor takeaway is that Cresco Labs is a bargain stock with the launch of recreational cannabis in New Jersey despite the federal legalization bills again stalling in Congress. The MSO shouldn't be trading at lows not seen since early 2020 with a booming business and an accretive deal with Columbia Care in the works.
Investors should continue using this sector weakness to snap up cheap shares of Cresco Labs.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock, you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.