The volume in cannabis stocks is likely to rise again in the fall after shares slumped during the summer, providing investors an opportunity to take advantage of the liquidity.
Interest in marijuana stocks is also likely to increase during the next couple of months since several states will vote in November on legalized use of recreational cannabis, including Arizona and New Jersey.
Volume in cannabis stocks typically wanes during the summer, especially in July and August as the cannabis exchange-traded funds rebalance and sell some of their holdings.
“Historically, it’s been a better time to invest once we get out of July/August,” says Jason Spatafora, co-founder of marijuanastocks.com and head trader at truetradinggroup.com.
There is higher share volume in the sector because it now includes larger companies with more liquidity, which attracts more institutional investors, says Timothy Seymour, founder of Seymour Asset Management in New York and portfolio manager of Amplify Seymour Cannabis ETF (ticker: CNBS), whose top three holdings are GW Pharmaceuticals ( GWP) at 14.22%, Canopy Growth Corp. ( CGC) at 13.06% and Innovative Industrial Properties ( IIPR) at 10.47%.
There are at least 10 cannabis companies in North America with billion-dollar market capitalizations, including several U.S. companies at $2 billion to $5 billion.
“The bottom line is that the industry is more investable due to greater clarity on profitability at the top firms,” says Seymour, who also manages JW Growth Fund, a hedge fund.
Strong Second Quarter
Second-quarter earnings were “very strong sequentially and year to year in top multistate operators in the U.S., he says. “Free cash flow generation means these companies can take market share even while capital markets are difficult due to federal issues. Execution within this sector is very different than other sectors with COVID-19 headwinds.”
The cannabis market reported strong sales since March because it was considered an essential business during the pandemic and recreational and medicinal users increased their purchases. In Oregon in March, $84.5 million of marijuana products were sold, an increase of 6.4% from the record of $79.4 million in sales from August 2019, according to the Oregon Liquor Control Commission.
The industry will increase to an anticipated $33.9 billion by 2025 with a compound annual growth rate of 18.2%, according to a recent report by The Arcview Group, a San Francisco-based cannabis investment and research firm.
The U.S. cannabis market will provide the most opportunities for investors as more states have legalized adult and medicinal use. Investors face the possibility of lackluster returns for the near term from the Canadian market due to supply chain bottlenecks, over-expansion and fiscal irresponsibility by the companies, and excessive regulation by the government.
“Now the black market is thriving, and investors can clearly see a divergence from the Canadian LPs and the U.S. multistate operators a year after Canada legalized the recreational use of cannabis,” Spatafora says.
More Canadian cannabis companies will fail than succeed, similar to the outcome of dot-com companies in the 2000s when the stocks tanked, he says.
Cannabis companies in the U.S. are often more mature compared with the Canadian ones and have better cash flow and revenue growth, resulting in higher profit margins.
“A lot of these later-stage companies had to be more fiscally responsible, and investors have seen the benefit of that,” Spatafora says.
These companies are generating good earnings, experiencing “amazing growth” and not carrying a lot of goodwill, which can drag down profits, he says.
The story comes down to the population and addressable market in the U.S.
“We have 10 times the population of Canada,” Spatafora says. “We still have the catalyst that can really set the cannabis industry on fire.”
Marijuana Stocks to Consider
Some of the heavyweights that investors should consider adding to a portfolio include Curaleaf Holdings (CURLF) since it is opening dispensaries in Florida at a rapid rate and “crushing it in revenue with medical marijuana,” along with Cresco Labs (CRLBF), which has a footprint in several states, he says. Green Thumb Industries (GTBIF) has a presence in multiple states and positive earnings before interest, taxes, depreciation and amortization.
Trulieve Cannabis Corp. (TCNNF) is a cannabis stock that investors should hold for the long term because it is a main operator in Florida and expanding rapidly, Spatafora says.
Trulieve reported growth rose by 146% from 2018 to $252.8 million in revenue in 2019 and generated revenue of $216.9 million during the first two quarters of 2020. The company opened 15 new locations in 2020 for a total of 60. In addition to its locations in Pennsylvania, California and Connecticut, Trulieve secured provisional licenses for production and retail in Massachusetts and is assessing additional opportunities to enter new markets as cannabis regulations are finalized or through mergers and acquisitions, says CEO Kim Rivers.
“With over 50% of market share in Florida, Trulieve has benefited from the growing number of medical cannabis patients in the state and a loyal customer base,” she says. “The cannabis industry overall has seen remarkable growth in the past years, and we believe the rollback of prohibition will continue nationwide. Two-thirds of Americans support legalizing cannabis, and state and federal leaders are beginning to see legal cannabis as a source of significant tax revenue, as well as a social justice issue.”
Seymour recommends that investors own Green Thumb, Curaleaf, Trulieve and TerrAscend Corp. (TRSSF).
Investors should be looking for businesses that are undervalued relative to their peers, says Rob Hunt, principal at San Diego-based Linnaea Holdings. He recommends that investors add Cresco Labs even though it has “weathered a few recent storms but is now looking strong as business units have gained traction in several key markets” and Scotts Miracle-Gro Co. ( SMG), which is “still dominating the cultivation supply side of the industry and is a terrific ancillary play,” he says.
“Most investors know the names of the three or four largest U.S. cannabis businesses, but if you dig a bit deeper, there are some real gems that get significantly less attention,” Hunt says.
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