If you’re a value investor then you are probably terrified of the cannabis sector.
There’s good reason for that. After a few years of big gains, many of the most popular cannabis stocks are trading with sky-high valuations. That leaves traders asking – are cannabis stocks overvalued?
You might be surprised to learn that there is a group of up-and-coming cannabis stocks that look super cheap compared to their overvalued peers. I am going to reveal this promising group of cannabis stocks. Plus I’ll show you a chart that tips me off that shares are set to soar.
US Cannabis Stocks are Undervalued
Look no further than the U.S. for undervalued cannabis stocks.
Currently, U.S. cannabis stocks are extremely undervalued compared to their Canadian counterparts. Here’s why… Canadian cannabis stocks have been surging for the last three years.
Investors poured billions into the sector ahead of Canada becoming the first developed country in the world to legalize recreational cannabis in October of 2018. This pushed valuations to nose-bleed levels.
For example, Canopy Growth Corp (WEED, CGC), the largest cannabis company in the world, is up more than 2,000% in the last three years, climbing from $3.00 to $60.00. I’m still optimistic Canopy and believe that Canadian cannabis stocks will perform well in the next few years. However, if you want value you have to look at US cannabis stocks.
While Canadian cannabis stocks were rallying big, the most promising US cannabis stocks didn’t even exist. That changed in the fall of 2018 with a flurry of US cannabis stock IPOs. These young and promising US cannabis stocks remind me of Canadian cannabis stocks back in 2016.
- They have relatively low valuations.
- These stocks lack awareness and investor interest.
- There is Huge revenue potential with federal legalization on the horizon.
To prove my point, I’ll share one of the most revealing charts you will ever see on the global cannabis sector. The chart below ranks cannabis companies by forward price-to-sales ratio. This key valuation metric is the current stock price over the predicted sales per share. For value investors, the lower the ratio the better.
As you can see, the three most richly-valued cannabis stocks are three of the largest Canadian cannabis companies. Once you get past Cronos, Aurora, and Canopy and into US cannabis stocks, the valuations begin to fall sharply.
Canadian Cannabis Stocks
- Cronos Group (CRON): 138X
- Aurora Cannabis (ACB): 44X
- Canopy Growth Corp (CGC): 27X
US Cannabis Stocks
- Curaleaf Holdings (CURLF): 13X
- Harvest Health and Recreation (HARV): 9X
- Cresco Labs (CRLBF): 7X
- Trulieve Cannabis Corp (TRUL): 7X
- CV Sciences (CVSI): 6X
- Charlotte’s Web (CWEB): 2X
Take a look at this great valuation chart from YCharts. This chart tells me that labeling the cannabis sector as overvalued is simply inaccurate. What I see is that certain segments are richly valued while other segments are actually relatively undervalued.
For value investors, and all investors in general, this is an important distinction. I see plenty of opportunities for great value stocks.
Top Cannabis Value Stock
Here is one of the most promising cannabis stocks from the group. This early industry leader:
- Is one of the most undervalued cannabis stocks.
- Saw Q1 sales jump 85% from last year.
- Is one of the highest revenue cannabis companies in the world.
- Is setting up for a break out on the chart.
CV Sciences (NASDAQ: CVSI) is a US-based cannabis company and an early leader in the high-growth CBD market. Headquartered in Las Vegas, Nevada, CVSI has a market cap of $464 million, making it one of the largest cannabis companies in the US. CVSI has been on a roll for the last twelve months. The company just delivered awesome Q1 results that show it is successfully executing its ambitious growth strategy. Revenue jumped 85% from last year to $15 million. That puts CVSI to break $60 million in revenue in 2019, making it one of the highest revenue companies in the industry.
That impressive revenue production also makes CVSI one of the most undervalued cannabis stocks in the sector. Its forward P/S ratio of just 6X is a fraction of Canadian leaders such as Cronos, Aurora, and Canopy. CVSI is looking bullish on the chart. Shares rallied big in 2018. Since then, CVSI has been consolidating into a pennant – a formation that frequently leads to an upside breakout and new 52-week high.
The relative strength index below the chart is showing that shares are the most oversold they have been in 18 months. Looking forward, I expect CVSI to grind back to the 52-week high and break out into a new all-time high.
Are Cannabis Stocks Overvalued? Depends on Where You’re Looking.
There is a common misconception that cannabis stocks are overvalued. But as you can see from this chart, that’s not true. US cannabis stocks look undervalued compared to their Canadian counterparts. For investors that love value stocks, this is the place to be looking – with CVSI being one of the most undervalued in the entire sector.
Michael Vodicka owns shares of Canopy Growth Corp, Aurora Cannabis, Harvest Health and Recreation, Cresco Labs, Charlotte’s Web and CV Sciences.
About the Author
Michael Vodicka is an equity analyst with more than 20 years of experience trading and investing. His research has been featured in some of the industry’s most respected publications. He has been investing and leading investors in the cannabis sector since 2013