Cannabis markets haven’t been doing so well lately.
There has been an industry-wide correction that is still in
play after the mania that took place in 2018.
We remain bullish on the sector in the long-term as the industry matures and more states legalize cannabis. And right now, there’s an amazing opportunity unfolding.
We’ve identified a way to buy shares of one of the top US cannabis stocks at a discount of nearly 30%.
Undervalued
Cannabis Stocks 2019
Cresco Labs (CRLBF) is a cannabis company based in Chicago. Convenient, considering Illinois is set to legalize cannabis in all forms on January 1st of 2020.
Cresco has seen an unbelievable 253% increase in revenue over the last year. Cresco’s profit margin is also improving as the company continues to grow.
How is this growth coming about? Both organically and through acquisitions. One of the biggest and most important acquisitions made by Cresco is expected to close in the fourth quarter of this year. Origin House, previously CannaRoyalty, is the target.
Buying shares of Origin House now could yield sky-high returns when the merger goes through.
Why Buy Origin House?
Why is Origin House (ORHOF) such a good deal at present?
The pending acquisition of Origin House by Cresco has two possible outcomes:
- The merger goes through, and investors wind up having received Cresco shares at a huge discount via buying Origin House shares beforehand, or
- The deal doesn’t go through, in which case Origin House still does well due to the boost in credibility and visibility given by the prospect of this deal. Some shareholders prefer this option and believe the offer by Cresco does not fully value Origin House.
Uncertainty due to the risk of the merger not happening has driven Origin House down to oversold levels, creating a buying opportunity.
This is somewhat unreasonable given that the people involved have every incentive to get the deal done. It would be the “largest public company acquisition in the history of the U.S. cannabis industry,” as Cresco has stated.
From MarketWatch:
“[The deal] establishes Cresco Labs as the leading multi-state operator with one of the largest distribution platforms in California, which is projected to be a $7.7 billion cannabis market in 2022 by Arcview Market Research/BDS Analytics,” said Cresco Chief Executive and Co-founder Charlie Bachtell. “Following the closing of this acquisition, Cresco brands will be in over 725 dispensaries across the country, giving us the largest and most strategic distribution footprint of any cannabis company in the United States.”
Obviously, having the largest distribution platform in the
largest market for cannabis in the world (California) puts Cresco in an
excellent position to be profitable.
What about the premium on Cresco offered through buying shares of Origin House before the merger? Holders of common shares of Origin House will receive 0.8428 subordinate voting shares of Cresco Labs.
The share prices of OH and CL at the time of writing are about $8.08 and $12.45, respectively.
Assuming the conversion rate of ORHOF to CRLBF to be 0.8428, the value of your ORHOF shares after the acquisition by Cresco will be roughly $10.50.
In other words, you can acquire shares of Origin House today at a discount of over 29%.
And again, even if the merger somehow doesn’t go through (which looks increasingly unlikely), OH can still be a value buy as the fact that CL is even considering acquiring it speaks to the company’s potential and has increased its visibility. Much of this value is due to Origin’s distribution and branding network within the world’s most-prized cannabis market – California.
Cannabis Markets
are Oversold in 2019
Looking at the MJ ETF gives some indication of the overall market condition. Cannabis markets are oversold without a doubt.
MJ Chart via Tradingview.com
RSI is low at around 30 and prices are near long-term support. For the MJ ETF in particular, prices have dipped below the 9-day moving average, a development that has previously led to a price rebound more often than not. Remember, we are talking about a sector where some of the bellwether companies are posting 200% to 300% year-on-year growth and 50% to 100% quarter-on-quarter growth with gross margins of 50% or more.
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All of this may sound like an outstanding opportunity, and it is. But there are two even more undervalued cannabis stocks in 2019 that could yield tremendous profits. These two companies are growing revenues even faster than Cresco and have higher margins.
To find out the name of these undervalued cannabis stocks and get all of our top picks across cannabis stocks, gold and silver mining stocks, cryptocurrencies and more, subscribe to the GSB newsletter here.
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