Cresco Labs Stock Price Forecast: More Short-Term Upside

Cresco Labs stock price has been in a deep sell-off as cannabis shares retreat. Shares of the Canadian company have retreated by about 52% year-to-date and are approaching their lowest point since April 2020. The stock has lost about 81% of the value from its all-time high and underperformed the broad cannabis industry. The closely-watched AdvisorShares Pure US Cannabis ETF has dropped by about 48% YTD.

Regulation and valuation concerns

Cresco Labs and other cannabis stocks like Sundial Growers, Canopy Growth, and Truelive Cannabis have all declined sharply in 2022. This decline has been much worse than the broader market considering that the Dow Jones and Russell 2000 indices have dropped by less than 20%.

There are three main reasons for this sell-off. First, from a macro perspective, investors are living in a new normal of high interest rates and falling liquidity. In Canada, the BOC has hiked interest rates several times in 2022 while the Federal Reserve has hiked by 150 basis points. Following the strong jobs numbers, investors anticipate another 0.75% hike in July and 0.50% in September.

In periods of high tightening, investors tend to dump highly unprofitable companies like Cresco Labs, Affirm, and Upstart. This is the primary reason why Cresco has fallen sharply this year. While its revenue has surged from just $3.2 million in 2016 to over $805 million in 2021, its losses have risen to more than $200 million.

US Cannabis regulations

Cresco Labs has a large presence in the United States, a country where cannabis is a highly controversial industry. The House of Representatives, which is controlled by Democrats has already passed legislation seeking to legalize weed in the country. 

The bill has nonetheless died in the Senate, where Democrats need at least 10 more Republicans to make it into law. This will be impossible, especially now that Democrats are set to lose their majority in the upcoming mid-terms. 

Therefore, legislators are calling on Biden to classify cannabis as a Schedule 1 controlled substance. They cite the health, economic, and racial benefits of areas where cannabis has been legalized. Still, such a measure will likely be challenged in court and overturned if the presidency changes. 

Further, Cresco Labs stock price has crashed because of the ongoing dilution of existing shareholders. As part of its organic and acquisition strategy, the firm has increased the number of outstanding shares from 27 million in 2018 to over 250 million. 

The most recent dilution happened when the company spent $2 billion to acquire Columbia Care. Historically, mergers in the cannabis industry have not been all that successful. For example, the Tilray stock price has crashed by over 78% in the past 12 months. This is after its merger with Aphria concluded.

Cresco Labs stock price forecast

Cresco Labs stock

The daily chart shows that the Cresco stock price has been in a strong bearish trend in the past few months. This drop culminated in it falling to the YTD low of $3. This price is notable since it is along the lower side of the descending channel shown in purple. The stock has remained in this channel since March last year.

Therefore, while the overall trend is bearish, the stock will likely attempt to recover in the coming weeks. If this happens, a possible target for the stock is the 50-day moving average level at around $4.6. However, a drop below the lower side of the channel will signal that there are more sellers still in the market.

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