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The Decline of Cresco Labs Stock Creates a Great Entry Point

The U.S. cannabis multi-state operator (MSO) sector isn’t getting a lot of respect lately despite a group of stocks building a strong future. A prime example is Cresco Labs (CRLBF) trading near multi-month lows following strong Q2 results. The stock is being overlooked as the market losses focus during the dull summer months while Cresco Labs builds a solid position in 2020.

Strong Q2

The U.S. MSOs have multiple paths for growth. The companies can buildout existing licenses in states with approved cannabis and enter new states once cannabis is approved. A prime example is the approval of adult-use cannabis in Illinois.

The actual financials are messy and a prime reason why the stock has hit a period of weakness. During Q2, Cresco Labs saw Q2 revenues surge 42% QoQ to $29.9 million. The issue here is that pro-forma revenues were $52.7 million for 55% sequential growth.

Investors have to decide on whether to value the stock based on actual or pro-forma revenues. The market appears to be passing on the stock due to the regulatory approval delays considering the stock reached a high in April following the announcement of the acquisitions.

Cresco Labs has a market value of $1.1 billion or something slightly below $2.0 billion on a fully diluted basis with the closing of both Origin House (ORHOF) and VidaCann. The deals were expected to close by June and now apparently won’t close until later this year.

The company generated a Q2 adjusted EBITDA of $2.3 million and Cresco Labs has working capital of $128.7 million with zero debt so the company doesn’t need the deals to survive and thrive. Unfortunately for shareholders, the market sees the sector as needing these large deals to close and the regulatory uncertainty has investors sitting on the sidelines.

Part of the problem could be the lack of seeing the full financials of companies that will contribute 45% of current revenues. The integration is crucial to the success and a couple of decent deals at the same time could be tricky for an unproven management team.

The Future

Without these deals closing, Cresco Labs has the Illinois market going from 5 dispensaries to 10 stores as the adult-use market opens up on January 1. The Illinois market is targeted at $2 to $4 billion in sales and alone matches some of the global cannabis markets that Canadian LPs are chasing. Cresco Labs doesn’t even have to chase this market as it just opens up for the company that will surely improve the profits of the U.S. MSOs over the Canadian peers.

In addition, the company has a license in Michigan and regulatory approval to enter

New York via the acquisition of Valley Agriceuticals, LLC. Cresco Labs is poised to expand into Michigan, New York and Massachusetts with or without closing the acquisitions of Origin House and VidaCann.

Takeaway

The key investor takeaway is that regulatory uncertainty is a big factor in the weakness of Cresco Labs. The company is positioned for substantial growth one way or another allowing investors to comfortably take advantage of the current stock weakness.

At only $8, Cresco Labs now offers the potential for a $1+ billion business trading with a fully diluted market valuation below $2 billion.

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