Sector rotation is a thing that affects the market from time to time. Tech stocks got beat up after investors rotated into consumer discretionary names looking for a bit more security and stability following last year's big run up.
Other sectors glow bright early, only to flame out quickly, though there are tremendous opportunities that remain. Cannabis stocks neatly fit the bill here. The promise of marijuana legalization sent the industry soaring, only to see it tumble back to earth after the reality of regulation and taxation caused investors to realize it might take longer to profit than expected.
That doesn't mean investors should avoid the space. In fact, the two stocks below have been unfairly discarded by the market despite possessing enormous growth potential.
Multistate operator Columbia Care (OTC:CCHWF) is an instance of the market throwing the baby out with the bath water. This marijuana stock is a fast-growing small cap moving quickly to establish itself as the go-to cannabis brand.
Columbia Care is licensed to operate in 18 of the 36 states that have legalized marijuana for either personal or medicinal use. It operates 99 dispensaries, runs 31 cultivation and manufacturing facilities, and has wholesale distribution in 13 markets, making it one of the largest vertically integrated MSOs around.
To achieve market dominance, Columbia is pursuing a two-pronged strategy: Growth by acquisition to achieve scale quickly, but also to focus on states where competition is legislatively limited. With only so many licenses to go around, it can be the leading operator with a well-known brand in the market.
Shares of Columbia Care have fallen over 37% since the start of the year and are down nearly 50% from its February highs as investors abandoned the cannabis space en masse.
Analysts, though, see significant upside in Columbia Care's stock, with Cantor Fitzgerald setting a $5.50 price target on its shares. Other analysts also see huge potential, as the industry is expected to produce some $20 billion in annual sales. The de-risking of marijuana nationally leads to much greater growth opportunities, and Columbia Care's beaten-down stock is primed to benefit.
Trulieve Cannabis (OTC:TCNNF) is another MSO with differentiated levers it can pull to rise above the rest. First, it's primarily focused on operating in Florida, where it is the state's largest licensed medical marijuana provider with the most locations and the greatest volume and about a 50% share of the market.
It's looking to replicate that success, however, by slowly branching out into other states, obtaining licenses in seven additional states. It then builds on this concentration by selling premium quality marijuana at dispensaries.
It's piloting a new strategy in Massachusetts where it is selling clones of its top-drawer leaf to individuals, allowing them to grow their own version of Trulieve's plants. It's limiting the testing phase to only its Chocolope NewBerry Sativa strain, but if well received, Trulieve may introduce other strains and add more locations for purchase.
The narrowness of its initial growth allowed Trulieve to keep its operating costs down, allowing it to be a profitable venture -- 14 consecutive quarters at last count -- among so many cannabis companies that run up mounting losses. Now it's expanding, and doing so through acquisitions if necessary, such as its pending purchase of fellow MSO Harvest Health & Recreation.
It wasn't a cheap purchase, but Harvest's Arizona base gives Trulieve 15 more dispensaries that should capitalize on the state's marijuana authorization last year. Moreover, Harvest has a presence in Florida, too, further bolstering Trulieve's dominant presence.
Shares are down 21% in 2021 (and are off 50% from its February high too). But it also has support from Wall Street, which sees significant gains coming, making Trulieve Cannabis a discounted marijuana company that's ripe for the picking.