Given that cannabis legalization is considered a growth trend, you may assume that there are few (if any) undervalued cannabis stocks. However, whether we’re talking about undervalued in the traditional sense of the term, or undervalued using other metrics, there are plenty of names in the space that fit within this category.
There are companies either directly in the cannabis space, or in adjacent industries, that trade at low price-to-earnings multiples, or at a discount to book value. In addition, there are cannabis stocks to buy based upon the fact that they are undervalued relative to future potential.
What makes these types of cannabis stocks appealing is the fact that, given their under-appreciation by the market, small positive developments could drive big gains, given the potential for shares to surge both on improving fundamentals and price discovery.
This could especially prove to be the case if and when the U.S. federal marijuana laws are relaxed/reformed. With this in mind, let’s dive in and take a look at the seven most undervalued cannabis stocks currently out there.
Green Thumb Industries (GTBIF)
Green Thumb Industries (OTCMKTS:GTBIF) is a leading multi-state operator. MSOs are companies that own and operate regulated cannabis operations across multiple U.S. states. On a P/E and price-to-book basis, this cannabis purveyor does not appear undervalued.
GTBIF stock currently has a forward earnings multiple of 55.8, and trades at a 52% premium to book value. However, as analysts at Zuanic & Associates (a cannabis stock research firm) argued last month, this “blue chip among the larger MSOs,” strong growth potential, irrespective of whenever federal marijuana law reforms ever happen.
Green Thumb shares have performed solidly in 2023, surging by nearly 20%. A revenue and earning beat last quarter may suggest strong operating performance will continue in the quarters ahead. The company’s existing large presence would also likely give it a big first mover advantage if cannabis became fully legal on the U.S. federal level.
Innovative Industrial Properties (IIPR)
Innovative Industrial Properties (NYSE:IIPR) is not directly in the cannabis business. Rather, this real estate investment trust owns and leases out commercial property to state-licensed cannabis operators.
Using traditional metrics, IIPR stock is one of the undervalued cannabis stocks. This REIT trades at a price-to-funds from operations ratio of just 10.7, a discounted multiple compared to other industrial REITs. Admittedly, industry risks help to explain this valuation discrepancy.
However, if the Federal Reserve pivots on interest rates next year, IIPR, like other REITs, is likely to benefit from a re-expansion of its multiple. Revenue (up nearly 10% last quarter) and FFO (up 7.5% last quarter) also continue to grow at a steady clip. Potential upside from growth and lower interest rates, coupled with IIPR’s 8.13% dividend, could be the recipe for some strong long-term total returns.
Cannara Biotech (LOVFF)
Cannara Biotech (OTCMKTS:LOVFF) is a cannabis stock that I’ve previously noted as being undervalued and under-the-radar. Shares in this Canada-based vertically-integrated cannabis firm trade for only 11.4 times trailing twelve month earnings.
LOVFF stock sports this low multiple, although the company’s revenue increased by 93% last fiscal year (ending August 2023), with net income surging threefold during this same time frame. That’s not to say, of course, that the current fiscal year will bring similar growth.
But even if Cannara’s growth decelerates from here, greater awareness of this low-priced pot stock could result in outsized gains for shares. Keep in mind that Cannara is relatively less liquid than other names in the space. That may present challenges if you’re looking to enter/exit a position. However, if you are aware of the risks, it’s one of the top cannabis stocks to consider.
WM Technology (MAPS)
WM Technology (NASDAQ:MAPS) is one of the more unique cannabis stocks. This company’s shares make it a SaaS stock and a cannabis stock play.
After experiencing a big run-up in growth from the late-2010s through 2022, WM Technology has experienced a bit of a growth slump.
Yet despite entering a near-term rough patch, as InvestorPlace’s Jeremy Flint pointed out in October, long-term growth potential with MAPS stock remains high. According to Flint, the cannabis industry is expected to keep growing at a 25% annualized clip through the start of the next decade.
Such growth could be even stronger if federal cannabis law reforms arrive far sooner than currently anticipated. That’s not all. Operational strategy changes discussed on WM’s most recent earnings conference call could result in better-than-expected results in the quarters ahead.
Marimed (MRMD)
Marimed (OTCMKTS:MRMD) is another cannabis stock that I’ve previously noted as being undervalued in the traditional sense. However, since last discussing this particular MSO, the company has gone from reporting positive earnings to reporting net quarterly losses.
So, why do I consider it still one of the undervalued names in the space? As Zuanic & Associates noted in the aforementioned research report, Marimed’s swing to quarterly losses has to do with its ramping up of growth-related capital expenditures.
By keeping its foot on the growth gas pedal, Marimed could quickly scale into one of the top MSOs. Once the company is ready to take its foot off the pedal, this could result in a dramatic increase in profits. This in turn could result in a big jump for MRMD shares. As also noted before, Marimed could be an ideal acquisition candidate, whenever federal cannabis laws finally change.
Newlake Capital Partners (NLCP)
Just like IIPR, Newlake Capital Partners (OTCMKTS:NLCP) is a cannabis REIT, owning and leasing out space to state-licensed cannabis producers. If IIPR is one of the undervalued cannabis stocks, one could say that Newlake is one of the deep value cannabis stocks.
Yes, NLCP stock trades at a discount, because of perceptions that it is a riskier cannabis REIT. However, as a Seeking Alpha commentator recently argued, this valuation discrepancy may more than cover the increased risks.
Based on valuation metrics, it’s easy to agree with this commentator’s take. NLCP trades at a P/FFO ratio of 7.9, well below that of IIPR. This REIT also trades at a 30% discount to book value, and sports a double-digit dividend yield (11.22%). The reporting of “less bad” results, lower interest rates, and cannabis law reforms are all catalysts that could drive an eventual big comeback for NLCP.
Turning Point Brands (TPB)
Back in April, I called Turning Point Brands (NYSE:TPB) one of the top cannabis stocks. Even as TPB has delivered a mixed price performance since then, I still consider it one of the cannabis stocks to buy. This is not a cannabis pure play.
Turning Point is primarily a tobacco company, with Stoker’s smokeless tobacco its most prominent brand. However, as the U.S. distributor/marketer of Zig Zag rolling papers, it has high exposure (pun intended) to the cannabis sector. Zig Zag sales have entered a slump recently, and the main play with TPB stock now has more to do with the continued growth of Stoker’s.
Still, if Turning Points pulls off a turnaround of the Zig Zag segment, low-priced TPB (trading for just 8.8 times earnings) could surge substantially, thanks to both profitability growth and multiple expansion.
On the date of publication, Thomas Niel 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.