Why 5 U.S. Cannabis Stocks Will Outperform Amid Federal Ban

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Five American cannabis stocks—Curaleaf Holdings Inc. (CURLF), Green Thumb Industries Inc. (GTBIF), Cresco Labs Inc. (CRLBF), Harvest Health & Recreation Inc. (HRVSF), and Acreage Holdings Inc. (ACRGF)—are poised to outperform their Canadian rivals as sales of legal cannabis grow at a rate of more than 20% per year, according to Compass Point Research & Trading, as per a recent article by Barron’s.

Despite marijuana still being illegal under federal law, close to 80% of the world’s legal sales of the drug will take place in the U.S. this year, providing investors a big reason to choose U.S. over Canadian pot stocks, especially considering the much lower valuation multiples of the former compared to the latter.

“We cannot help but notice a striking level of disparity when comparing the major Canadian companies to the largest American multistate operators,” said Rommel Dionisio and Isaac Boltansky of Compass Point.

What It Means for Investors

Based on market capitalization, the big five Canadian producers combined are more than double the size of the top 10 American producers. Canada’s largest—Canopy Growth Corp. (CGC), Tilray Inc. (TLRY), Aurora Cannabis Inc. (ACB.XTSE), Cronos Group Inc. (CRON) and HEXO Corp.— combine for a total market cap of $36 billion, whereas America’s top 10 (which includes the five listed in the intro) combine for a total of $17 billion.

But to judge whether or not shares of the American firms are undervalued or not, those shares need to be scaled by sales or earnings. In the case of the still nascent cannabis industry, where companies are still in early stages of the growth life cycle and have not yet reached a mature stage of more stable profitability, sales is generally the better metric. 

Compass Point’s analysts estimate that in 2020, Canadian producers will sell $2.7 billion of legal pot while the U.S. producers will sell $4.8 billion. With a significantly larger amount of sales expected in the U.S., it is surprising that Canadian stocks are trading at more than 10 times 2020 sales, while the U.S. stocks are trading at just 3 times sales, according to the analysts’ forecasts.

The U.S. stocks are thus selling at a significant discount to their Canadian rivals, presenting investors with a huge buying opportunity. 

Looking Ahead

The big question still hanging over the U.S. cannabis industry is legalization, as federal law still considers the drug an illegal substance. But individual states continue to loosen regulations with Illinois being the most recent state to allow recreational pot use, bringing the total percentage of the U.S. population living in states that have legalized recreational use to 30%. The federal prohibition certainly hasn’t hindered Curaleaf or Harvest Health, which saw their respective sales grow by 17% and 14% from the fourth quarter of last year to the first quarter of this year.

Source: Investopedia

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