Curaleaf CURLF and Green Thumb Industries GTBIG have been turning a new leaf in US states that have legalized adult-use cannibals. Behind the scenes, however, cannabis stocks have underperformed, with US federal regulations yet to ease up. But that underperformance is leaving both stocks trading in undervalued territory.
Investors can get a different type of buzz from Lithium Americas LAC, as the company’s first lithium project is underway following its split from its Argentina business in 2023. But until that project gets going, the firm isn’t generating any revenue, and its stock is languishing well below Morningstar’s fair value estimate.
For this article, we screened Canadian-listed stocks covered by Morningstar analysts, ranked them based on their price/fair value estimates, and pulled the bottom three most undervalued stocks.
The cheapest name on the list is Vancouver-based Lithium Americas. The US government is set to lend the firm US$2.26 billion for its critical Thacker Pass mining project. “Lithium Americas is just beginning construction on its first lithium project,” says Morningstar strategist Seth Goldstein, who follows the stock. “As a result, the company won’t generate revenue for at least several years. In the meantime, the stock will likely trade on lithium prices, the broader lithium market sentiment, and the company’s need to raise additional equity to fund corporate overhead expenses and potential cost overruns on construction.”
Goldstein notes that lithium stocks in general have come under significant downward pressure. “All lithium stocks have sold off on falling [lithium] prices,” he says. “In the wake of lower lithium prices, the market may be assigning a chance the Thacker Pass project does not move forward, which results in heavily discounting the stock.”
Green Thumb and Curaleaf (US-based companies listed in Canada) are also both significantly undervalued. Morningstar equity strategist Kristoffer Inton cautions that while the stocks are at potentially attractive prices, both carry an Uncertainty Rating of Very High due to their ”high risk, high reward’ nature. “Although we think there's enough discount from the market price to our fair value estimate to compensate for the risk, there's still a wide range of possible valuation outcomes,” on the stocks, he says.
As with lithium stocks, cannabis names have overall been struggling. “Cannabis stocks have severely underperformed, as the market remains overly focused on the progress of easing federal prohibition,” Inton says. “Under federal prohibition, US multistate operators pay extremely high tax rates, can't list on the major stock exchanges, and face other limitations.”
Investors could potentially “benefit from investing in the growing stages,” Inton says. The market for cannabis stocks remains focused on the potential for the US federal prohibition on cannabis being relaxed. “The easing of federal prohibition that would significantly reduce tax burdens and increase liquidity of shares.” Meanwhile, multi-state cannabis operations like Curaleaf and Green Thumb “have been building attractive footprints in states that have legalized medical and adult-use cannabis,” he explains.
Here’s a closer look at these three undervalued stocks.
Lithium Americas LAC
- Price/Fair Value: 0.19
- Morningstar Uncertainty Rating: Very High
- Morningstar Rating: 5 stars
- Economic Moat: None
“Lithium Americas aims to become a pure-play lithium producer. The company was created as a result of the former Lithium Americas separation, which split the firm's North America business, which is the current Lithium Americas, from its Argentina business, which was named Lithium Argentina.
Lithium Americas' only resource is the Thacker Pass lithium project in the US state of Nevada. Thacker Pass is currently in construction, with plans to enter production later in the decade.
“As electric vehicle adoption increases, we expect double-digit annual growth for lithium demand. Lithium Americas should benefit as there should be more than enough demand for company’s three resources to enter production and expand capacity over time.”
Seth Goldstein’s commentary on Lithium Americas can be found here.
Curaleaf CURA
- Price/Fair Value: 0.25
- Morningstar Uncertainty Rating: Very High
- Morningstar Rating: 5 stars
- Economic Moat: None
“Curaleaf cultivates and sells cannabis in the US with a presence in 17 states. Vertically integrated, Curaleaf produces through 18 cultivation sites and sells directly through 145 dispensaries and wholesale to other dispensaries. Compared with other multistate operators, Curaleaf has generally employed a more aggressive growth strategy, which hasn't always paid off, leading to exits and sales.
“Curaleaf has also made acquisitions that give it exposure to serve the potentially lucrative European market, competing with major Canadian cannabis cultivators and a unique feature among US multistate operators. Exporters must pass strict regulations to enter markets, which protects early entrants like the Canadian companies. With the recent legalization of adult-use in Germany, we think Curaleaf should stand to benefit.”
Read more of Kristopher Inton’s take on Curaleaf here.
Green Thumb Industries GTII
- Price/Fair Value: 0.45
- Morningstar Uncertainty Rating: Very High
- Morningstar Rating: 5 stars
- Economic Moat: None
“Green Thumb Industries cultivates and sells medicinal and recreational cannabis through wholesale and retail channels in the US. Unlike its Canadian peers, the firm is more vertically integrated, as it owns dispensaries in addition to the cultivation and processing of value-added products. It has a presence in 14 states through 20 production facilities, and 92 dispensaries. In states with more mature cannabis markets, Green Thumb believes there are enough cultivators available and purchases cannabis from third parties. This helps reduce capital intensity for expansion without sacrificing exposure to widening legalization.
“Its growth strategy focuses on states with large populations and limited licenses, including Illinois, Massachusetts, New York, Florida, and Ohio. It strategically operates in states with robust medical cannabis markets with momentum around future recreational legalization.”
Read more of what Kristopher Inton has to say about Green Thumb here.
