In this article, we will discuss the 8 most undervalued pot stocks to buy according to analysts.

A decade ago, the cannabis industry was in full swing as stock valuations exploded to record highs in states across the country legalizing pot use for medicinal and recreational purposes. Fast forward, valuations have crashed as harsh realities set in. While legalization on the state level has gathered pace in recent years, marijuana remaining illegal on the federal level is turning out to be one of the biggest stumbling blocks.

Far higher taxes in handling federally prohibited cannabis and its products have hit the industry hard. Similarly, legal weed sales have faced stiff competition from the illegal market, something that has hurt companies’ ability to ramp up sales and generate significant shareholder value. The just concluded US election has added yet another layer of uncertainty for the pot industry. While Vice President Kamala Harris had given the clearest indication to legalize recreational use nationally, she lost the election waiting to see what is in store under the Donald Trump administration.

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Nevertheless, it is a fact that the pot industry suffered its biggest blow yet on the ballot on state legalization referendums failing through. North Dakota, South Dakota, and Florida all had unsuccessful referendums to legalize recreational use. Only Nebraska’s medical use referendum was successful.

Twenty-four states in the United States have legalized marijuana for adult use, and Florida might have added a sizable market for the cannabis sector. According to marijuana analytics company Headset, recreational marijuana sales in the state could have reached between $4.9 billion and $6.1 billion in the first year after legalization.

Amid the setbacks, the cannabis sector outlook remains positive as the focus shifts to reclassifying marijuana as a less serious federal offence. President-elect Donald Trump has shown that he is open to supporting changes and new laws for marijuana. This could greatly help the struggling marijuana industry.

According to ATB Capital Markets analyst Frederico Gomes, reclassifying pot as a less federally severe crime would offset any effects of failure to pass substantial amendments during the referendum. Due to the harsh treatment of Cannabis under the so-called 280E tax code, pot businesses currently pay effective tax rates of over 70%.

The provision also prevents companies dealing in schedule one or two controlled substances from claiming tax credits. Consequently, reclassification would translate to about $3.5 billion being injected back into the sector, thus lowering the overall cost for capital and sparking a flurry of activities, according to Katan Associates International founder Seth Yakatan.

“I think the combination of the rescheduling [of Cannabis] to Schedule III, having businesses able to deduct their business expenses, is building momentum for other changes. I think in short order, after this happens, very likely [there will be a] change in federal policy regarding banking. As you know, it is very hard for state-legal cannabis businesses to have bank accounts. It’s also very expensive, and they are charged a premium,” said U.S. Rep. Earl Blumenauer in an interview with the Wall Street Journal.

The most undervalued pot stocks to buy could turn out to be big winners in the regulatory environment improving under the new administration come next year.

Our Methodology

To create a list of the most undervalued cannabis stocks to buy, we looked through different cannabis ETFs to find companies that are heavily involved in the cannabis industry. We then scanned for stocks that analysts believe are undervalued with a price to earnings multiples of less than 20 and well positioned to generate significant long-term value. Finally, we ranked the stocks in ascending order based on the stock’s upside potential as of November 26.

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8 Most Undervalued Pot Stocks to Buy According to Analysts

8. Quest Diagnostics Incorporated (NYSE:DGX)

Stock Upside Potential: 4.97%

Forward Price to Earnings Ratio (P/E): 16.47

Number of Hedge Fund Holders as of Q3 2024: 32

Quest Diagnostics Incorporated (NYSE:DGX) is a leading medical testing company in the US, with around 2,300 locations. They offer workplace drug tests for marijuana using urine, saliva, and hair samples. As one of the biggest lab testing companies, they could benefit from the legalization of marijuana. More marijuana use means more drug tests for drivers and workers, which could boost Quest Diagnostics’ profits.

The company’s competitive edge stems from offering drug testing services certified by the US Department of Health and Human Services. Consequently, it is well-positioned to win big contracts for testing workers in safety-sensitive fields. Quest Diagnostics Incorporated (NYSE:DGX) boasts a solid track record of success and profitability, as depicted by solid third-quarter results delivered on October 22, 2024, whereby revenues were up 8.4% yearly to $2.49 billion, beating estimates by 3.4%. Earnings came in at $1.99 a share, up 1.5% from last year.

Quest Diagnostics Incorporated (NYSE:DGX) gave optimistic full-year 2024 guidance, predicting revenues of between $9.8 billion and $9.85 billion and adjusted earnings per share (EPS) of $8.85 to $8.95, despite operational difficulties and weather-related delays. The strategic acquisition of LifeLabs and organic growth were the main drivers of the better-than-expected third-quarter results. Additionally, the LifeLabs acquisition marked a significant milestone, expanding the company’s footprint in Canada, one of the most important cannabis markets.

Fiduciary Management Inc. stated the following regarding Quest Diagnostics Incorporated (NYSE:DGX) in its Q2 2024 investor letter:

“Quest Diagnostics Incorporated (NYSE:DGX) is one of the largest independent clinical laboratory testing companies in the U.S. with a 24% market share of independent lab testing, and its scale gives it a cost advantage. The clinical testing industry sees steady volume growth, helped by increasing test volume due to an aging population, higher prevalence of chronic disease, and advancements in medical technology that continue to expand the scope of clinical testing. The broader lab industry is an $85 billion market, accounting for only 2% of total healthcare spending, yet influencing over 70% of medical decisions. Today, nearly 60% of diagnostic tests are performed in a hospital or at a hospital outreach laboratory. Importantly, performing the same diagnostic test at an independent lab can cost anywhere between two and five times less than performing the same test in a hospital lab. Quest’s average revenue per requisition is under $50. There is a nationwide focus on increasing preventative healthcare and lowering healthcare costs in general. Independent labs are part of the solution, as there is a huge value to be reaped by pushing more volumes through them. In the past, Quest has seen reimbursement challenges from both government and commercial payors. We believe that reimbursement headwinds have largely abated due to all payors recognizing the large cost-benefit of higher volumes flowing through the independent labs. We expect Quest to generate mid-single-digit topline growth and expand margins, leading to high-single-digit earnings growth. With Quest’s dividend and share repurchases, there are prospects for a low-double-digit total annual return, which is attractive given the defensive nature of the business and well-below market valuation.”

7. Innovative Industrial Properties, Inc. (NYSE:IIPR)

Stock Upside Potential: 11.31%

Forward Price to Earnings Ratio (P/E): 18.94

Number of Hedge Fund Holders as of Q3 2024: 13

Innovative Industrial Properties, Inc. (NYSE:IIPR) is a real estate investment trust that acquires, owns, and manages specialized properties leased to state-licensed cannabis operators. As one of the key players supporting growth in the cannabis sector through real estate, the company has seen its revenue more than triple from $116.9 million in 2020 to over $300 million in 2023. Its net income has also more than doubled over the same period.

Innovative Industrial Properties, Inc. (NYSE:IIPR) delivered solid third-quarter results on November 6, 2024, with $39.7 million in net income attributable to shareholders and $57.6 million in funds from operations. Revenues dropped to $76.5 million from $77.8 million a year ago, the decline was due to a $3 million decrease in contractual rent and property management fees.

Innovative Industrial Properties, Inc. (NYSE:IIPR) remains in a solid financial position with over $220 million in available liquidity backed by a portfolio of 108 properties in 19 states.