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Overall market sentiment on cannabis remains bearish as cannabis stocks have been on a severe downtrend YTD. Current market volatility has made matters worse for cannabis stocks. The larger assumption is that only federal legalization can save the downtrend and it is unclear when it might happen. 

Revenue numbers have been decreasing for Canadian LPs as the oversaturated cannabis market experiences price compression. Canadian LPs have suffered from a history of net loss and low margins, which has produced additional investor skepticism. American MSOs have not fared any better on the markets, although business has been going well for them. 

The cannabis investor has no place to hide from current extreme market volatility. Is it time to dump all cannabis stocks and wait for legalization and for market sentiment to change? Although short-term sentiment on cannabis is extremely bearish, long-term potential on cannabis stocks still seems promising. It is important to look deeply into each cannabis and cannabis support company and see which one has the most potential for future growth, regardless of legalization or retail price compressions.

Cannabis stocks have recently hit their 52-week lows and some have experienced short-term recovery. It is possible that we have seen the bottoming of all cannabis stocks or there may be more downtrend to come. I have been focusing on cannabis companies with alternate revenue sources and increasing revenues. These companies which have diversified their business strategy may experience continual growth and new stock price uptrends.

Although each cannabis and cannabis related company has its own advantages and disadvantages, I will highlight three companies, which have interesting potential for future growth. Sundial Growers (SNDL), Clever Leaves (CLVR), and 22^nd Century (XXII) should be watched and considered in the long-term. These companies have been on the same downtrend as the other cannabis companies. As the stock prices moves to a discount, the company’s valuation becomes more realistic. A company with improving financial performance may beat the curve and the current limitations.

Current Valuations

Cannabis stocks have been on a severe downtrend YTD and over the last 12-months. To make matters worse, most companies are reporting a net loss for their last quarterly report. As the stock price decreases, the overall valuation becomes more impressive. Cannabis companies are trading at a more realistic, if not undervalued, stock prices at the moment. The companies trade at a discount compared to a year ago or 15-months.

Cannabis stocks have seen several days of uptrend when the greater market is rallying. It is yet to be seen whether these stocks ultimately make gains and find higher price channels or continue along a see-saw pattern, losing a little each time. With the undervaluation in mind and the potential for a new uptrend, let us consider a few companies which show some long-term promise.

Sundial Growers

Sundial Grows (SNDL) is currently debt free and cash positive. The Canadian cannabis LP raised over a billion in cash last year when its stock price rallied. Since then, the company has been restructuring and buying new opportunities. Sundial was already a far-reaching Canadian cannabis producer and distributor. The company now operates over 170 cannabis retail locations with the acquisition of Spiritleaf and Nova Cannabis. It also purchased Alcanna, a large Canadian liquor retailer with 171 locations. 

Sundial Growers now operates in two retail segments: liquor and cannabis, while also growing, producing, and manufacturing cannabis products. Sundial will begin to report additional revenues per quarter, including CA$160 million or more in liquor and cannabis retail sales. The company should report significantly higher revenues through 2022. 

There is risk in making a new stock investment in Sundial Growers. The company’s stock price has been on a severe downtrend, recently hitting its 52-week low. The company’s stock has traded under $1 per share for too long and now faces the real possibility of a reverse split. Neptune Wellness (NEPT) recently underwent a 6-1 reverse split and the company’s stock price is still downtrending. There is no guarantee that Sundial’s stock will make any real upward progress during this year. In the long-term perspective, Sundial Growers is worth watching.

Clever Leaves

Clever Leaves (CLVR) is a producer and an international exporter of cannabis. The company has GMP certified grow facilities in Colombia and Portugal. It enjoys a low cost per gram production. Clever Leaves is ramping up its Colombian grow operations because the government recently approved a framework for large-scale international cannabis exports. Clever Leaves has been exporting cannabis to Israel, Australia, and Brazil.

Clever Leaves has expanded into European cannabis markets. The company is currently selling cannabis in the German medical cannabis markets. It has plans for rapid expansion in Germany and throughout Europe. The company is laying the groundwork for global exports to additional countries and regions.

Clever Leaves expects revenue growth with these developments throughout 2022 as well as with its American nutraceutical and CBD retail operations. Investor sentiment has recently been bullish on Clever Leaves because of its business strategy and progress. The company was able to pay off significant parts of its debt during a recent rally of its stock price. 

Clever Leaves also brings risks to the stock investor. It has yet to be seen how much revenue growth the company is capable of over the next year. So far, results have been mixed. The company is entering new and undeveloped markets, which is both exciting and risky. The company’s stock price has been hit hard by recently volatility and has hit its 52-week low. There is strong sentiment in the company’s long-term potential. Few other cannabis companies have begun to master international exports and foreign cannabis markets.

22^nd Century Group

22^nd Century Group (XXII) is not a traditional cannabis company and this may be a good thing to an investor looking for lower risk. The company develops innovative plant genetics, while also growing, manufacturing, and distributing its retail products. The company works in three segments: tobacco, cannabis, and hops. 

22^nd Century Group had recent newsworthy developments, which will significantly increase its revenue potential. The company had been developing and growing low-nicotine tobacco products, which were being used by the government for tobacco cessation research. The company had its very low nicotine cigarettes approved by the FDA for US sales as a smoking cessation product and has now increased manufacture and distribution of its VLN products. The company is also selling these tobacco products in international markets, for instance South Korea.

Besides selling tobacco cessation products, the company also develops and licenses cannabis strains. Clever Leaves looks forward to a more robust relationship with the cannabis markets with its unique cannabis genetics. The company also operates a CBD / hemp farm in the US where it enjoys additional expansion into the selling of end products. 

The company has research in hops genetics. Hops is the plant used in the manufacturing of beer. 22^nd Century Group plans to make hops genetics tailored to the needs of the hops market. The company is still in the development stage of this segment, but the international demand for hops is substantial.

It is unclear by how much the company’s revenue will grow during 2022. In the long-term, the US government plans to mandate all tobacco products to contain low nicotine levels. The company is already far ahead of the game with no real competition. 

The company’s cannabis segment is producing revenue, but still in an early growth phase. Accordingly, there is not a high risk of destabilization in its cannabis revenues. The company makes some revenue from simply letting other companies grow its proprietary cannabis genetics.

There is risk of continued down trend with 22^nd Century Group’s stock price. The company does not yet have large institutional interest in its stock. It is sort of an undiscovered gem for the time-being. Because the stock is not well-known, it may experience a greater downtrend than the others. The company has long-term potential and investors should keep their eyes on the company’s future performance.

Conclusion

The stock market is experiencing bear conditions and cannabis stocks have been seriously affected. The cannabis investor has to cut losses and possibly stay away from the sector altogether. There may still be hope for the cannabis stocks and a possible new uptrend. US legalization and other US cannabis reforms may be the largest catalyst for cannabis stocks, but there are other fundamentals to watch. With the understanding that all cannabis companies are experiencing stock price downtrend, I have considered three companies, Sundial Growers, Clever Leaves, and 22^nd Century, worth watching for long-term potential and growth.