Canaccord While sector valuations “fade,” Canaccord Genuity analysts Matt Bottomley and Derek Dley sees fundamentals for U.S. cannabis companies “strengthening” ahead of the start of second-quarter earnings season next week.
“Although MSO valuations continue to face pressure since their February highs, we note that the group as a whole is largely flat or modestly up year-to-date,” they said. “However, we continue to assert that fundamentals in the U.S. have never been stronger and that structural issues hampering the ability for institutions to hold/clear U.S. cannabis equities have resulted in what we believe to be an attractive entry point for those able to participate in the space.”
The analysts say U.S. Senate Majority Leader Chuck Schumer release of his cannabis reform discussion draft last month did little to spark excitement, however they think the planned legislation “includes considerations that could be tremendously favourable for existing incumbent U.S. operators and represent a sizable de-risking event for the sector as a whole.”
“We believe the comprehensiveness of the draft plan will likely need to see substantial revisions in order to garner enough support to ultimately be implemented into law,” they said. “Due to the moderate-to-high risk of material changes before a draft is submitted to Congress, we believe the can has effectively been kicked down the road until later this year (fall) when investors hope to get better clarity on the realistic specifics of Schumer’s reform.”
Seeing “strong” growth in several key states, including Illinois, Florida and Massachusetts, the analysts said the second quarter “represents another period of all-time highs throughout the U.S.,” leading them to raise their ratings for several MSOs.
“Given what is expected to be continued strong fundamental performance in the U.S. as well as the continued growth and de-risking of the sector as a whole over the past several years, including: i) the legalization of adult-use cannabis in Massachusetts, Nevada, California, Illinois, Arizona, New Jersey and New York; ii) industry sales that we believe will come in well in excess of US$20-billion for 2021; iii) operators that have inflected well into profitability; and iv) a stated objective from the federal government to decriminalize and deschedule cannabis - structural issues in the capital markets aside, we believe many of the speculative elements of the sector have begun to rapidly dissipate,” he said.
They moved the following stocks to “buy” recommendations from “speculative buy” previously:
- Ascend Wellness Holdings LLC with a US$15 target. The average on the Street is US$16.
- Ayr Wellness Inc. with a $70 target. Average: $76.
- Columbia Care Inc. with a $15 target. Average: $14.61.
- Cresco Labs Inc. with a $19 target. Average: $23.69.
- Curaleaf Holdings Inc. with a $24 target. Average: $28.28.
- Green Thumb Industries Inc. with a $54 target. Average: $57.71.
- Jushi Holdings Inc. with US$8 target. Average: $12.43.
- Trulieve Cannabis Corp. with a $97 target. Average: $86.35.
- Harvest Health & Recreation Inc.with a $8 target. Average: $7.
- Verano Holdings Corp. with a $35 target. Average: $40.64.