In this article, we will discuss the 8 most undervalued pot stocks to buy according to analysts.
A decade ago, the cannabis industry was in full swing as stock valuations exploded to record highs in states across the country legalizing pot use for medicinal and recreational purposes. Fast forward, valuations have crashed as harsh realities set in. While legalization on the state level has gathered pace in recent years, marijuana remaining illegal on the federal level is turning out to be one of the biggest stumbling blocks.
Far higher taxes in handling federally prohibited cannabis and its products have hit the industry hard. Similarly, legal weed sales have faced stiff competition from the illegal market, something that has hurt companies’ ability to ramp up sales and generate significant shareholder value. The just concluded US election has added yet another layer of uncertainty for the pot industry. While Vice President Kamala Harris had given the clearest indication to legalize recreational use nationally, she lost the election waiting to see what is in store under the Donald Trump administration.
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Nevertheless, it is a fact that the pot industry suffered its biggest blow yet on the ballot on state legalization referendums failing through. North Dakota, South Dakota, and Florida all had unsuccessful referendums to legalize recreational use. Only Nebraska’s medical use referendum was successful.
Twenty-four states in the United States have legalized marijuana for adult use, and Florida might have added a sizable market for the cannabis sector. According to marijuana analytics company Headset, recreational marijuana sales in the state could have reached between $4.9 billion and $6.1 billion in the first year after legalization.
Amid the setbacks, the cannabis sector outlook remains positive as the focus shifts to reclassifying marijuana as a less serious federal offence. President-elect Donald Trump has shown that he is open to supporting changes and new laws for marijuana. This could greatly help the struggling marijuana industry.
According to ATB Capital Markets analyst Frederico Gomes, reclassifying pot as a less federally severe crime would offset any effects of failure to pass substantial amendments during the referendum. Due to the harsh treatment of Cannabis under the so-called 280E tax code, pot businesses currently pay effective tax rates of over 70%.
The provision also prevents companies dealing in schedule one or two controlled substances from claiming tax credits. Consequently, reclassification would translate to about $3.5 billion being injected back into the sector, thus lowering the overall cost for capital and sparking a flurry of activities, according to Katan Associates International founder Seth Yakatan.
“I think the combination of the rescheduling [of Cannabis] to Schedule III, having businesses able to deduct their business expenses, is building momentum for other changes. I think in short order, after this happens, very likely [there will be a] change in federal policy regarding banking. As you know, it is very hard for state-legal cannabis businesses to have bank accounts. It’s also very expensive, and they are charged a premium,” said U.S. Rep. Earl Blumenauer in an interview with the Wall Street Journal.
The most undervalued pot stocks to buy could turn out to be big winners in the regulatory environment improving under the new administration come next year.
Source: Pexels
Our Methodology
To create a list of the most undervalued cannabis stocks to buy, we looked through different cannabis ETFs to find companies that are heavily involved in the cannabis industry. We then scanned for stocks that analysts believe are undervalued with a price to earnings multiples of less than 20 and well positioned to generate significant long-term value. Finally, we ranked the stocks in ascending order based on the stock’s upside potential as of November 26.
At Insider Monkey, we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
8 Most Undervalued Pot Stocks to Buy According to Analysts
8. Quest Diagnostics Incorporated (NYSE:DGX)
Stock Upside Potential: 4.97%
Forward Price to Earnings Ratio (P/E): 16.47
Number of Hedge Fund Holders as of Q3 2024: 32
Quest Diagnostics Incorporated (NYSE:DGX) is a leading medical testing company in the US, with around 2,300 locations. They offer workplace drug tests for marijuana using urine, saliva, and hair samples. As one of the biggest lab testing companies, they could benefit from the legalization of marijuana. More marijuana use means more drug tests for drivers and workers, which could boost Quest Diagnostics’ profits.
The company’s competitive edge stems from offering drug testing services certified by the US Department of Health and Human Services. Consequently, it is well-positioned to win big contracts for testing workers in safety-sensitive fields. Quest Diagnostics Incorporated (NYSE:DGX) boasts a solid track record of success and profitability, as depicted by solid third-quarter results delivered on October 22, 2024, whereby revenues were up 8.4% yearly to $2.49 billion, beating estimates by 3.4%. Earnings came in at $1.99 a share, up 1.5% from last year.
Quest Diagnostics Incorporated (NYSE:DGX) gave optimistic full-year 2024 guidance, predicting revenues of between $9.8 billion and $9.85 billion and adjusted earnings per share (EPS) of $8.85 to $8.95, despite operational difficulties and weather-related delays. The strategic acquisition of LifeLabs and organic growth were the main drivers of the better-than-expected third-quarter results. Additionally, the LifeLabs acquisition marked a significant milestone, expanding the company’s footprint in Canada, one of the most important cannabis markets.
Fiduciary Management Inc. stated the following regarding Quest Diagnostics Incorporated (NYSE:DGX) in its Q2 2024 investor letter:
“Quest Diagnostics Incorporated (NYSE:DGX) is one of the largest independent clinical laboratory testing companies in the U.S. with a 24% market share of independent lab testing, and its scale gives it a cost advantage. The clinical testing industry sees steady volume growth, helped by increasing test volume due to an aging population, higher prevalence of chronic disease, and advancements in medical technology that continue to expand the scope of clinical testing. The broader lab industry is an $85 billion market, accounting for only 2% of total healthcare spending, yet influencing over 70% of medical decisions. Today, nearly 60% of diagnostic tests are performed in a hospital or at a hospital outreach laboratory. Importantly, performing the same diagnostic test at an independent lab can cost anywhere between two and five times less than performing the same test in a hospital lab. Quest’s average revenue per requisition is under $50. There is a nationwide focus on increasing preventative healthcare and lowering healthcare costs in general. Independent labs are part of the solution, as there is a huge value to be reaped by pushing more volumes through them. In the past, Quest has seen reimbursement challenges from both government and commercial payors. We believe that reimbursement headwinds have largely abated due to all payors recognizing the large cost-benefit of higher volumes flowing through the independent labs. We expect Quest to generate mid-single-digit topline growth and expand margins, leading to high-single-digit earnings growth. With Quest’s dividend and share repurchases, there are prospects for a low-double-digit total annual return, which is attractive given the defensive nature of the business and well-below market valuation.”
7. Innovative Industrial Properties, Inc. (NYSE:IIPR)
Stock Upside Potential: 11.31%
Forward Price to Earnings Ratio (P/E): 18.94
Number of Hedge Fund Holders as of Q3 2024: 13
Innovative Industrial Properties, Inc. (NYSE:IIPR) is a real estate investment trust that acquires, owns, and manages specialized properties leased to state-licensed cannabis operators. As one of the key players supporting growth in the cannabis sector through real estate, the company has seen its revenue more than triple from $116.9 million in 2020 to over $300 million in 2023. Its net income has also more than doubled over the same period.
Innovative Industrial Properties, Inc. (NYSE:IIPR) delivered solid third-quarter results on November 6, 2024, with $39.7 million in net income attributable to shareholders and $57.6 million in funds from operations. Revenues dropped to $76.5 million from $77.8 million a year ago, the decline was due to a $3 million decrease in contractual rent and property management fees.
Innovative Industrial Properties, Inc. (NYSE:IIPR) remains in a solid financial position with over $220 million in available liquidity backed by a portfolio of 108 properties in 19 states.
6. Abbvie Inc (NYSE:ABBV)
Stock Upside Potential: 13.62%
Forward Price to Earnings Ratio (P/E): 15.27
Number of Hedge Fund Holders as of Q3 2024: 68
AbbVie Inc. (NYSE:ABBV) is a pharmaceutical giant that develops, manufactures, and sells pharmaceuticals worldwide. The company offers Humira, an injection for autoimmune and intestinal Behçet’s diseases. Additionally, it is a big player in the cannabis sector with Marinol, its candidate cannabis drug that demonstrates the potential of cannabis as a therapeutic tool.
The drug also shows AbbVie Inc. (NYSE:ABBV)’s capacity to drive innovation with alternative treatments, which is more significant for the company’s stock. AbbVie has also filed for at least 59 cannabis-related patents in the United States. A cancer treatment, a treatment for juvenile idiopathic arthritis, and a cannabis treatment for skin conditions are among the active patents held by AbbVie involving cannabinoids.
Federal legalization of cannabis could encourage AbbVie Inc. (NYSE:ABBV) to use its vast infrastructure and resources to further invest in cannabinoid research.
5. Pfizer Inc. (NYSE:PFE)
Stock Upside Potential: 22.81%
Forward Price to Earnings Ratio (P/E): 8.78
Number of Hedge Fund Holders as of Q3 2024: 80
Pfizer Inc. (NYSE:PFE) is a pharmaceutical company that discovers, develops, and sells biopharmaceutical products. It offers medicines and vaccines in therapeutic areas of cardiovascular metabolic, migraine, and women’s health. The company made a significant entry into the burgeoning medical marijuana sector with a $6.7 billion acquisition of Arena Pharmaceuticals. Pfizer bought Arena Pharmaceuticals to boost its inflammation and immunology treatments. This deal gave Pfizer access to Arena’s experimental drug, Olorinab (APD371), which is designed to help with stomach pain related to gut disorders.
The development of cannabis-based treatments is part of Pfizer Inc. (NYSE:PFE)’s plan to diversify its product pipeline. The company is increasingly looking for ways to regain footing following a rapid decline in Covid business. In addition to cannabis drugs, the company is also betting on cancer drugs. Pfizer Inc. (NYSE:PFE)’s manufacturing optimization program, a major part of its strategy, is anticipated to save about $1.5 billion by the end of 2027. By the end of 2024, the company also hopes to save at least $4 billion in net costs. These cost-cutting initiatives aim to increase profitability and counteract possible revenue losses brought on by patent expirations.
Here’s what Parnassus Investments said about Pfizer Inc. (NYSE:PFE) in its Q1 2024 investor letter:
“During the quarter, we added new positions in Pfizer Inc. (NYSE:PFE), NICE and Charter Communications. We purchased Pfizer to capture the potential upside from any turnaround following the COVID-induced boom-bust cycle of the last few years. Pfizer’s stock price sank by more than 40% in 2023 as COVID-19 vaccine revenues rolled off, providing an attractive entry point for us. The company completed its acquisition of Seagen, which should strengthen Pfizer’s pipeline in antibody-drug conjugates (ADC). Pfizer also offers an attractive dividend yield.”
4. Chicago Atlantic Real Estate Finance, Inc. (NASDAQ:REFI)
Stock Upside Potential: 37.07%
Forward Price to Earnings Ratio (P/E): 7.48
Number of Hedge Fund Holders as of Q3 2024: 6
Chicago Atlantic Real Estate Finance, Inc. (NASDAQ:REFI) is a company that provides loans and financing for commercial real estate. They focus on clients in the cannabis industry, offering secured loans and other financial help to support their businesses. Chicago Atlantic Real Estate Finance, Inc. (NASDAQ:REFI) delivered impressive third-quarter results on November 7, 2024. The company benefited from a strong pipeline in existing states and a growing number of states that have legalized marijuana for adult use. Net income was up 21.7% sequentially to $11.2 million or $0.56 per diluted share. It ended the quarter with $362.3 million in total loan principal across 29 companies with an average yield of 18.3%.
Chicago Atlantic Real Estate Finance, Inc. (NASDAQ:REFI) stands out as one of the most undervalued pot stocks as it trades at a price-to-earnings multiple of 7.41 compared to an average forward P/E of 45 for real estate companies. The company has chosen to be taxed as a real estate investment trust (REIT), so it doesn’t pay federal corporate income taxes. This helps it give more money back to shareholders. Because it distributes 90% of its taxable income to stockholders, it attracts a lot of interest from investors who want regular income.
3. AFC Gamma, Inc. (NASDAQ:AFCG)
Stock Upside Potential: 39.14%
Forward Price to Earnings Ratio (P/E): 5.81
Number of Hedge Fund Holders as of Q3 2024: 6
AFC Gamma, Inc. (NASDAQ:AFCG) provides financial services to the cannabis industry, including real estate loans and loan underwriting. They offer direct and bridge loans ranging from $10 million to $100 million, which is crucial for an industry growing quickly but facing legal challenges. AFCG estimates the cannabis market to be worth about $30 billion. It earns money from interest on these loans, which are secured by real estate, equipment, and licenses.
AFC Gamma, Inc. (NASDAQ:AFCG) is committed to growing through new loans and strategic investments. In October, AFCG announced it provided $41 million in funding to Story of Maryland, LLC. Story MD will use this money to refinance debt and for working capital. Management believes that their financial performance will keep improving and stabilising as long as they find opportunities in key markets.
AFC Gamma, Inc. (NASDAQ:AFCG)’s third-quarter report delivered on November 13, 2024, shows strong earnings and strategic positioning. Net income came in at $1.4 million at the back of $7.2 million in distributable earnings due to successful origination efforts and active portfolio management. It also exceeded the $100 million target for new originations in 2024, showing the company’s capacity to assist top-tier operators in vital cannabis markets.
2. Jazz Pharmaceuticals plc (NASDAQ:JAZZ)
Stock Upside Potential: 45.63%
Forward Price to Earnings Ratio (P/E): 6.64
Number of Hedge Fund Holders as of Q3 2024: 40
Jazz Pharmaceuticals plc (NASDAQ:JAZZ) is a biopharmaceutical company that identifies, develops, and commercializes pharmaceutical products for unmet medical needs. While it focuses on oncology and neuroscience, the company also operates in the cannabis sector following the $7.2 billion acquisition of GW Pharmaceuticals.
Jazz Pharmaceuticals plc (NASDAQ:JAZZ) has a drug called Epidiolex, which is approved to treat childhood epilepsy. This drug has also shown promise in helping with mood, cognitive issues, and pain in people with Gulf War Illness. Epidiolex is notable because it was the first cannabis-derived medicine to get approval in the US and is also available in the UK. It plays a significant role in generating revenue for the cannabis sector.
In the third quarter of 2024, Jazz Pharmaceuticals plc (NASDAQ:JAZZ) reported that their sales of cannabis-based drugs increased by 18% compared to the same period last year, reaching $251.6 million. This growth in cannabis drug sales is a major factor driving the company’s overall success. Continued Epidiolex’s strong performance is one reason management maintained a total revenue guidance of $4.0 to $4.1 billion for 2024 for the full year.
1. Green Thumb Industries Inc. (OTC:GTBIF)
Stock Upside Potential: 74.95%
Forward Price to Earnings Ratio (P/E): 17.76
Number of Hedge Fund Holders as of Q3 2024: N/A
Green Thumb Industries Inc. (OTC:GTBIF) makes and sells cannabis products for both medical and recreational use. Its products include flowers, pre-rolled joints, concentrates, vapes, capsules, tinctures, and edibles. The company operates in 15 states with 18 production facilities and 77 stores, and has seven different brands. Green Thumb Industries Inc. (OTC:GTBIF) controls the entire process from growing to selling. In well-established markets, they buy cannabis from other producers to save on expansion costs.
Despite setbacks in legalizing adult-use cannabis in four states, Green Thumb Industries Inc. (OTC:GTBIF) is still in a strong position to benefit from the cannabis market, which is expected to double to around $31 billion. The company’s agreement with Magnolia Bakery, a cupcake and dessert chain that now sells THC-containing products made from hemp, is one factor driving its growth. On November 22, 2024, RISE Dispensaries, a cannabis retail chain owned by Green Thumb Industries, announced the opening of its 100th and 101st locations in Carson City, NV, and Brooklyn Park, MN. RISE Dispensaries sell cannabis products and now have 11 locations in Nevada and 8 in Minnesota.
Green Thumb Industries Inc. (OTC:GTBIF) delivered strong third-quarter results on November 7, 2024, with revenue up 4.2% year over year to $287 million, attributed to strong demand for its cannabis products. It also achieved an adjusted EBITDA of $89 million and a GAAP net income of $9 million. Additionally, GTBIF entered into a 5 year $150 million syndicated bank loan facility that strengthened its balance sheet, thus allowing it to retire a $225 million senior secured debt.
While we acknowledge the potential of GTBIF as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than GTBIF but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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