Cannabis stocks rose in the aftermath of voters overwhelmingly approving the medicinal and recreational use of marijuana in six states, increasing legal access to one-third of Americans.
The ballot measures in Arizona, Montana, New Jersey and South Dakota legalizing the use of cannabis for adults 21 and over received approval from voters. The use of medical marijuana was also passed by voters in Mississippi and South Dakota.
In the U.S., there are now 36 states and two territories, Puerto Rico and the U.S. Virgin Islands, that allow the use of medical marijuana, while 15 states, Washington, D.C., Guam and the Northern Mariana Islands can legally sell cannabis to adults.
The fact that three controversial, conservative states — Montana, Mississippi and South Dakota — passed measures for legalization is a sign of the times, says Jason Spatafora, co-founder of marijuanastocks.com and head trader at truetradinggroup.com. The University of Mississippi has been growing cannabis legally to study its impact since 1968 for the federal government.
With these developments in mind, here’s a look at the evolving landscape for the cannabis market and six of the best stocks to follow in the space:
— The path ahead for the cannabis market.
— Six marijuana stocks to watch.
The Path Ahead for the Cannabis Market
The addition of these states legalizing the recreational and medicinal use of cannabis will add at least $9 billion in new revenue from 2022-2025, according to New Frontier Data, a Washington, D.C. cannabis market data company. By 2025, revenue from cannabis sales is estimated to reach $35.1 billion.
“The marijuana sector is also creating thousands of jobs and bringing industries to places where they have been dying out like manufacturing,” Spatafora says.
The cannabis sector reached a bull market from 2016 to 2018 as many U.S. and Canadian stocks reached their all-time highs, and market capitalizations reached nearly $1 billion. The industry is now entering a second bull market since sales of cannabis and products such as edibles are “definitely recession and COVID-19 proof,” Spatafora says. “Even before the industry was deemed an essential business, sales except for February have risen every single month.”
Since New Jersey will begin selling cannabis for recreational use in 2021, it will increase pressure for New York and Pennsylvania to add ballot measures to legalize it and reap much-needed tax revenue as other industries have taken a toll from the impact of the pandemic.
“New Jersey’s passage is important to the Northeast Corridor, and once New York and Pennsylvania pass the recreational use of cannabis, at that point, 80% of the U.S. population will have some sort of access to cannabis,” he says.
Voter approval for the legalization of cannabis in South Dakota, Montana and Mississippi is “equally impressive” considering the conservative stance from those states and the message they are sending to other conservative-leaning legislatures, 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 Canopy Growth Corp. ( CGC) at 13.3%, GW Pharmaceuticals ( GWPH) at 11.2% and Aphria ( APHA) at 9.9% as of Nov. 10.
Legalizing the medicinal and recreational use of cannabis via state ballot initiatives is the right strategy because having full federal legalization would only cause bottlenecks from regulatory agencies fighting with one another, he says.
This strategy is working and putting more pressure on other state legislatures, especially in 2021, Seymour says.
New York Gov. Andrew Cuomo says he expects that New York legislators will greenlight the legalization of recreational use in 2021 since the state is facing a massive tax shortfall of billions of dollars due to the lingering impact of the pandemic.
“I think this year it is ripe because the state is going to be desperate for funding, even with Biden, even with the stimulus, even with everything else, we’re still going to need funding — and it’s also the right policy,” he said in an interview with public radio station WAMC on Thursday.
The cannabis sector has 10 companies in North America with billion-dollar market capitalizations, including U.S. companies at $2 billion to $5 billion, and more institutional investors are also buying shares.
[SEE: 7 Best ESG Funds to Buy.]
Six Marijuana Stocks to Watch
TerrAscend Corp. (TRSSF)
TerrAscend, a New York and Toronto-based North American cannabis operator, is a good buy for a cannabis portfolio, Seymour says. TerrAscend’s footprint includes New Jersey, where the company has a 140,000-square-foot indoor cultivation greenhouse that has post-harvest manufacturing capabilities. The company recently announced a 25% expansion at its Pennsylvania cultivation facility to keep pace with strong demand.
“TerrAscend is an interesting investment proposition due to its seasoned management team, strong balance sheet and vertically integrated operations in the state that features three retail licenses,” says Aaron Raub, senior equity analyst at Ambria Capital.
The passage of recreational marijuana in New Jersey will help the company generate more sales.
“It fits the model and has allowed them to be highly profitable in a limited license state where they are an early mover and the strong regional synergy that will play out here,” Seymour says. “Their brand and the experience at the retail dispensary is considered higher end since it is more sophisticated.”
The company reported second-quarter net sales rose by 36% sequentially and 169% year over year to $47.2 million Canadian dollars. The operations in the U.S. generated 90% of consolidated net sales. TerrAscend also reported adjusted earnings before interest, taxes, depreciation and amortization, or EBITDA, of $11.4 million Canadian dollars, increasing 131% sequentially, and cash equivalents of $75 million Canadian dollars as of June 30.
The company operates dispensaries in California, a manufacturer and distributor of hemp-derived products, and a Pennsylvania medical marijuana cultivator. It also manufactures cannabis-infused edibles.
The company has focused on only a handful of states that are east of the Mississippi where a limited license framework puts more of a moat around the business, Seymour says.
“Limited license states are more profitable, and TerrAscend has a focus on being either the dominant or one of the dominant players in the states they operate in,” he says.
Trulieve Cannabis Corp. (TCNNF)
Investors should plan on holding Trulieve for a longer period of time since the company has more than 50% of market share in Florida and is expanding rapidly, Spatafora says.
Trulieve reported revenue of $216.9 million during the first two quarters of 2020 and opened 15 new locations for a total of 60. The company is considering the possibility of adding locations in new markets once cannabis regulations are finalized or through mergers and acquisitions, says CEO Kim Rivers.
The rollback of prohibition will continue in other states, she says. “There has been a lot of positive movement both at the state and federal level toward reforming cannabis laws, and legislation such as the SAFE Banking Act, the STATES Act and the MORE Act could unlock additional potential in the market.”
Curaleaf Holdings (CURLF)
Curaleaf, a Wakefield, Massachusetts-based vertically integrated cannabis operator, announced on Nov. 6 that it would divest its cultivation and manufacturing facility in Frederick, Maryland to TerrAscend for $25 million in cash and a $2.5 million note yielding 5% that matures April 2022. The company closed also on the sale of its processing license in Cumberland, Maryland for $4 million.
The company has opened dispensaries in Florida at a rapid rate and has “crushed it in generating revenue with medical marijuana,” Spatafora says. The company operates in 23 states with 93 dispensaries and has 23 cultivation sites and over 30 processing sites.
The company will report third-quarter earnings on Nov. 17 and is trading at a 49% discount compared to the average U.S. operator, wrote Russell Stanley, a Beacon Securities analyst in a Nov. 6 report. Stanley has a “buy” rating and a price target of $22. Curaleaf is expected to report revenue of $193 million and adjusted EBITDA of $32 million with a 16% margin compared to a consensus with $191 million in revenue and adjusted EBITDA of $38 million with a 20% margin.
Cresco Labs (CRLBF)
Cresco Labs, a Chicago-based multistate operator, is also trading at a discount compared to other operators with footprints in several states, Stanley wrote in a Sept. 22 report. The company will likely focus on growth in Michigan, Massachusetts and Ohio since it has about “$50 million in tenant improvements to deploy,” he wrote. Beacon has an $11.50 price target for Cresco Labs.
The company reported second-quarter revenue of $94.3 million — a 42% quarter-over-quarter increase — 30% sequential revenue growth in all of the U.S. markets aside from Massachusetts and adjusted EBITDA of $16.5 million, or 419% growth from the previous quarter.
Cresco Labs is operating in nine states, has 15 production facilities, 29 retail licenses and 19 dispensaries.
Green Thumb Industries (GTBIF)
Green Thumb, a Vancouver and Chicago-based national cannabis consumer packaged goods company and retailer, reported revenue of $119.6 million in the second quarter, an increase of 16.6% quarter over quarter and 167.5% year over year. Demand did not decline despite the pandemic.
The company opened six stores in 2020, operates a manufacturing facility in Toledo, Ohio, and now has a total of 48 stores in the U.S. Green Thumb reported assets of $152.6 million with $83 million in cash and total debt outstanding of $95.2 million, with $0.3 million that is due within 11 months.
Investors should add Green Thumb to a portfolio because of its strong second-quarter earnings, Spatafora says.
The stock is the most expensive of the large, multistate operators. This may be based on the quality of its assets and the operational excellence the company has shown, leading to profitability earlier than others, Seymour says.
Innovative Industrial Properties (IIPR)
Innovative Industrial Properties is a real estate investment trust, or REIT, that focuses on the regulated U.S. cannabis industry and purchasing specialized industrial real estate assets for the regulated medical-use cannabis industry. The company’s strategy is to continue to acquire medical-use cannabis facilities in the U.S.
“They are attractive not only for the capital appreciation potential but for their dividend consistency as they have paid consecutive quarterly dividends to common stockholders since the second quarter of 2017,” says Michael Underhill, chief investment officer of Capital Innovations in Pewaukee, Wisconsin. “The financial model combined with the fact that sales of state-regulated cannabis in the U.S. will grow from $12.4 billion in 2019 to nearly $34 billion in 2025 sets the stage for continued growth and income for investors for several years.”
The company reported net income of $13 million and revenue of $24.3 million in the second quarter, a 183% increase from the prior year’s second quarter. IIPR paid a quarterly dividend of $1.06 in July, a 77% increase over the second-quarter dividend in 2019.
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