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Why Cresco Labs Stock Still Looks Like a Good Long-Term Bet

Cresco Labs (CRLBF) shares have risen nearly 13% this month, at a time when much of the cannabis industry has been under pressure from investors abandoning speculative markets and some bad news coming from the sector concerning growing pot in unlicensed facilities.

This is interesting because Cresco Labs had lagged most of its peers in 2019, until it announced the news it had made an offer to acquire Origin House for $823 million. That would give it a big footprint in California if it gains regulatory approval.

It also received regulatory approval to go ahead with its acquisition of Gloucester Street Capital (parent of Valley Agriceuticals), which will close near the end of August. This gives them a footprint in the fourth largest U.S. market of New York.

Combined with its home market of Illinois and its build-out in other states, Cresco Labs has been gaining a lot of momentum leading up to its earnings report this evening.

Valley Agriceuticals deal

With momentum favoring Cresco Labs at this time, it was a nice boost to get the Valley Agriceuticals acquisition deal approved of by regulators a short time before its earnings report was scheduled.

The primary significance of the deal is it receives one of the 10 cannabis business licenses awarded by the New York State Department of Health. Individual licenses allow a company to operate one cultivation facility and four dispensaries in the state of New York.

CEO of Cresco Labs, Charles Bachtell, said this:

As the holder of one of only 10 vertically integrated businesses licenses in New York, we believe that Cresco Labs will make a significant impact in this large and influential market that is projected to grow to $500 million by 2022, according to Arcview/BDS Analytics.

At this time Valley Agriceuticals has two dispensaries operational, one in Bardonia and another in New Hartford, and should have the other two opened in Brooklyn and Long Island within a couple of weeks. That means it won't be long before the company gets a boost to its top and bottom lines from the acquisition.

Investors need to know that this doesn't include recreational pot because New York didn't legalize it when it came up for a vote. So while it may not generate the immediate revenue that would accompany adult-use pot, it does provide an improvement to its margins and earnings as a result of medical cannabis sales

To get an idea of the potential, as of this writing New York has 105,000 medical cannabis patients, and it could reach over five times more patients than that if it reaches about 3 percent of the New York population. In Arizona, medical cannabis penetration is 2.9 percent.

Origin House is the major catalyst behind share price boost

Much of the recent climb in share price for Cresco Labs is associated with its bid to acquire Origin House. Why it matters is it would give Cresco a huge footprint in the largest cannabis market in the world.

Origin House is one of only several companies that hold cannabis distribution licenses in California. Consequently, Cresco will be able to sell its products to over 500 dispensaries in the state. It can't be overestimated how much this would increase the performance of Cresco over the short and long term.

The caveat is the companies haven't yet received approval from regulators after they were asked to provide more information. While that's not unprecedented, it is unusual.

It appears the market is still considering it a done deal, which is why the share price has skyrocketed so quickly.

It wouldn't surprise me to see it climb, but as its earnings day approaches, it may be wise to take some profits off the table. I think a lot of the upside has been priced in, and if there is any disappointment in the earnings report, its share price will quickly pull back.

Further out, if the deal is not approved, the share price is going to get crushed. Even so, the company is building a solid base to grow from, and even under that scenario it will recapture some of that once the market settles down.

If the deal is approved, it will of course get a temporary big upward move in the share price in response to the positive catalyst.

Other catalysts

Cresco Labs has other growth initiatives being deployed at this time, including the announcement it's going to open up 50 stores in 11 states.

Its first Sunnyside dispensary will open in Philadelphia in November. with other stores scheduled to be open in Arizona, Florida, Illinois,  Massachusetts, and Michigan, among other states. Illinois should be important to Cresco once it legalizes recreational pot in January.

One weakness of Cresco has been the low number of open dispensaries it has had. That will change once these deals are consummated and adds more stores organically.

Another strong catalyst has been the outlook analysts covering the stock have. Three of those covering it have a “strong buy” rating on the stock, and four others have a “buy” rating.

Recently Matthew Pallotta of Echelon Wealth Partners initiated coverage on Cresco Labs, starting it off with a “Speculative Buy” rating.

Some of the positive outlook is related to the company proving it can take significant market share in some markets, including Illinois (28 percent) and Pennsylvania (30 percent), according to the company.

Since it has done so well in those states it is well established in, the assumption is it should be able to successfully scale out to other markets as well.

In the early days of recreational pot legalization in Illinois, Cresco could capture more market share because of its three production facilities and as many as ten licensed recreational pot dispensaries.

With all the recent bullish outlook concerning Cresco, it should taken into account that it still lags behind where it had traded not too long ago.

Conclusion

Cresco Labs hasn't impressed the market so far in 2019, as it has had only a small number of dispensaries in operation in contrast to some of its major competitors, but that is quickly changing.

While the company is growing in many ways, the fact is its recent increase in share price is based primarily upon the assumption it will be allowed to proceed with its acquisition of Origin House.

If that does get approved, it will position Cresco Labs as one of the largest generators of revenue in the U.S., and in fact, the world. It, combined with the other catalysts mentioned above, will drive the share price of the company much higher, and it may even be able to sustain it for some time if it releases some impressive earnings reports.

I like Cresco, but it really is dependent upon the Origin House deal being approved. Since it's not guaranteed, it will be held back some until that is made clear.

Even if it doesn't get approved, there are still a lot of catalysts to propel the company to long-term growth, albeit at a much more modest pace than is expected at this time.

To get TipRanks’ stock analysis report on Cresco Labs, click here