Is The Market Misreading Cresco Labs Inc (CNSX:CL) (OTCMKTS:CRLBF)?

For marijuana stocks, 2019 is a year to forget. This is the year that saw a broad selloff in marijuana stocks, with many pot stocks plunging to multiyear lows. Cresco Labs Inc (CNSX:CL) (OTCMKTS:CRLBF) did not escape the widespread marijuana stocks selloff. At $5.1/share currently, Cresco is down 62% in the last seven months.

About Cresco Labs

Here is a brief profile of Cresco for those investors who may have just come across this company for the very first time. Cresco Labs is marijuana company that currently operates in six US states but is in the process of entering more markets. Headquartered in Illinois, Cresco is engaged in the cultivation, processing, and retail of marijuana products. It already has several popular marijuana product brands to its credit.

Investors have avoided Cresco Labs for the wrong reason

A number of pot stocks have started recovering, but Cresco has continued to trade near its record lows. What might be happening?

Investors recently sold Cresco stock after the company announced an arrangement with Canaccord Genuity to raise up to C$55 million in additional cash through equity sale. Worries about the dilutive impact of the Canaccord Genuity deal seemed to drive the selloff. But investors selling off Cresco stock forget that while many marijuana companies have been scaling down their production, suspending projects and cutting jobs, Cresco has actually been expanding. The company has been expanding its production capacity, adding more retail outlets through strategic acquisitions and hiring more people.

While the Canaccord Genuity arrangement may lead to stock dilution, that is nothing compared to the huge return investors can expect from Cresco down the road, especially considering how well the company is positioned in the marijuana market.

Here are three reasons Cresco stock is a buy heading into 2020.

• Cresco is in solid financial standing

The big banks have generally shunned doing business with pot companies for fear of running afoul of federal regulators. Consequently, many American marijuana companies face limited funding options without the big banks being there to provide them loans. Funding shortage has scrimped development and resulted in lost opportunities at many marijuana companies. But funding isn’t a big problem at Cresco. The company finished the third quarter with $73.7 million in cash. In addition, Cresco has no debt. All that means that Cresco can continue to invest in its development and take advantage of the opportunities as they arise while its competitors struggle with financing shortage and debts to repay.

• The growth potential for Cresco in its home state is enormous

Cresco has bright growth prospects. In Cresco’s home state of Illinois, medical marijuana is currently the only available market. But that is about to change in just a few weeks from now. Illinois legalized recreational marijuana this past summer and the sale of recreational marijuana in the state is set to begin on January 1, 2020. Recreational marijuana will widen the market opportunity for Cresco in a state where it already has the largest share of the medical marijuana market. Cresco has prepared well for the recreational marijuana market in Illinois, including through expanding its cultivation and processing capacity, and hopes to have a strong first-mover advantage.

The marijuana market in Illinois was estimated at $1.6 billion in 2018 and is forecast to grow to $4.0 billion by 2022, presenting Cresco with a huge growth opportunity in its backyard. That should allow the company to continue its robust revenue growth for more years. Cresco’s revenue grew 184% year-over-year in the third quarter, building on the back of 253% year-over-year revenue growth in the second quarter and 313% year-over-year growth in the first quarter.

• Cresco expanding in the world’s largest marijuana market

Cresco is about to close a landmark deal: acquisition of Origin House, a marijuana brand development platform and distribution company operating in the United States and Canada. The acquisition of Origin House is expected to close in early 2020 and will give Cresco’s expansion into California a significant boost. California is the world’s largest marijuana market. Marijuana sales in the state topped $2.5 billion in 2018 and are on track to hit $5.6 billion by 2022.

The addition of Origin House will go a long way into fueling Cresco’s sales and potentially accelerate the company’s march to profit territory.

In addition to California, Cresco is also expanding in New York, Massachusetts, and Michigan. All these three states have promising marijuana markets.

In New York, for instance, Cresco recently expanded in the state with the acquisition of Valley Agriceuticals, thereby adding four marijuana shops in the state at once. Marijuana sales in New York were $264 million in 2018 and are projected to increase to over $1.5 billion by 2022.

Bottom line

Although Cresco Labs has dropped alongside other marijuana stocks, there is a good chance the market has unfairly punished Cresco. But that may have only opened an opportunity for investors who can decipher Cresco’s bright prospects to enter the stock at a steep discount.

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Disclosure: We have no position in Cresco Labs and have not been compensated for this article.