Haywood Securities opened its coverage of US cannabis stocks with ‘buy’ ratings on Curaleaf Holdings, Trulieve Cannabis and Cannex Capital Holdings.
If you want to strike it rich on marijuana investments, then analyst Neal Gilmer recommends that you go south (not west, young man) and head to the land of opportunity. Mr. Gilmer, who is responsible for special situations research at Haywood Securities, leads the firm’s coverage of US cannabis stocks (as well as the industry in Canada) from Toronto.
“Sentiment towards cannabis continues to become more positive, with a majority of both Democrats and Republicans in favour of legalization,” he says. “It is our view that this will only continue to increase, particularly as Americans head to the polls in a year and a half to elect the next president.
“Presidential candidates will need to be clear on their stance on the matter as it is likely to factor into the decision-making process of voters.”
US marijuana market is growing
Based on the current regulatory landscape for medical and recreational marijuana use (33 states permit medical use and 10 permit adults to use cannabis recreationally), Haywood predicts that the total US market size will range between US$15.9 billion and US$21.7 billion by 2022.
Most of the states that have adopted regulations for legal marijuana consumption are still refining and advancing their respective programs, with few mature markets, leaving ample opportunity for growth, the analyst stresses.
“Certain key, highly populated, states with existing medical programs are considering (recreational) adult use, including New York, New Jersey, Illinois and Arizona, among others. All of this leads us to state the obvious, which is that we remain in the early stages of the overall cannabis opportunity in the US”
These 3 US marijuana stocks trade in Canada
Haywood opened its coverage of the US cannabis industry in mid-May. Its inaugural ‘buy’ selections (and Mr. Gilmer’s ‘best buys’) are Curaleaf Holdings Inc. (CNSX—CURA), Trulieve Cannabis Corp. (CNSX—TRUL) and Cannex Capital Holdings Inc. (CNSX—CNNX). Although the companies operate in the United States, all three trade on the Canadian Securities Exchange and their shares are priced in Canadian dollars.
Comparing the historical trading multiples of cannabis stocks with US and Canadian assets year-to-date, there is a stark difference among the groups, says the analyst. Multiples are naturally lower for cannabis companies with US assets given its still-illegal status on the federal level, he concedes. However, he adds: “We believe this disparity should narrow over time.”
According to the Haywood calculations, the average Canadian licensed producer with a market capitalization above $1 billion has traded at an average multiple of 25.9 times enterprise value divided by 2020 estimated earnings before interest, taxes, depreciation and amortization (EBITDA). Meanwhile, the average has been just 9.8 times in the case of US-focused companies.
Access to capital growing in USA
“Over the course of the past year, we have seen the emergence of a number of publicly-traded US multi-state operators,” says Mr. Gilmer. “Realistically, this is all the result of those leaders in the industry who were at the forefront pushing for change in legislation at the various local and state levels.”
Those grassroots developments, however, were stymied by limited access to capital, he explains.
“It is no secret that most states have had highly fragmented, vibrant cannabis markets operating for quite some time despite local, state, or federal law.
“As most states implemented regulated programs, many companies seized this opportunity to raise private capital to build out their operations across multiple states. As access to public capital emerged, primarily in 2018 for US asset operators, we have seen a significant increase in multi-state operators and a significant increase in acquisitions to build and expand their presence.”
Barriers remain for multi-state business strategies
All three of Mr. Gilmer’s US cannabis stocks are working from a multi-state business strategy. Numerous marijuana-related bills are making their way to American lawmakers, he notes. If they pass, they should reduce existing barriers and serve as a catalyst for US cannabis companies’ stock prices in 2019.
Nevertheless, the analyst reinforces that the industry remains speculative and immature.
“The US market presents an incredible opportunity for investors with the appropriate risk profile. There is no doubt that significant risk remains, and we continue to expect the sector to be volatile.
“There are a number of hurdles to overcome, aside from what happens at the federal level.”
Mr. Gilmer sets a target share price of $20 for Curaleaf and $28.50 for Trulieve. His target price for Cannex (and pending acquisition 4Front Holdings) is $2.75.
This is an edited version of an article that was originally published for subscribers in the June 7, 2019, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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