In Morningstar’s report from June titled “Buy American Cannabis Stocks Regardless of Federal Legalization”, the research firm believes cannabis investors should buy American and its top picks are Curaleaf (OTC: CURLF) and Green Thumb Industries (OTC: GTBIF). The analyst Kristoffer Inton acknowledges that the market seems to reward Canadian companies since the country is fully legal. However, he believes that American cannabis companies stand to experience revenue growth and rapid margin expansion even if federal legalization doesn’t happen.
“Curaleaf and Green Thumb have strong revenue tailwinds outside of federal policy as more states legalize, new dispensaries open, and black market and new customers enter the legal market,” Inton wrote. “Unlike their Canadian peers, American MSOs have turned top-line growth into expanding profitability. Indeed, when it comes to cannabis, investors should buy American.”
Canadian Stocks Appear Blessed
Morningstar noted that Canadian stocks have moved higher than American colleagues. “From the beginning of 2021 to early February, Aurora, Canopy, Cronos, and Tilray shares rose by 33% to 161% compared with Curaleaf and Green Thumb rising just 15% and 28%, respectively. In our view, this was due to the market’s increased expectations for legalization and not operational performance, as the Canadian producers generally struggled during pandemic restrictions while American producers continued to rapidly expand profitability.” Inton said that except for Canopy Growth and Cronos, Canadian producers’ U.S. operations are largely limited to hemp-derived CBD and alcohol. So federal legalization would carry no benefit to these companies.
Beyond stock valuations, Inton also highlighted the contrast in profitability between U.S. and Canadian producers. “From 2017 to 2020, both groups’ revenue rose roughly 120% to 220% per year on average. However, while Americans Curaleaf and Green Thumb saw adjusted EBITDA margins expand to 20% to 30%, of the Canadians, only premerger Aphria had reached and premerger Tilray neared positive adjusted EBITDA. Aurora Cannabis, Canopy Growth, and Cronos continued to generate massive profit losses, albeit narrower than in prior years.”
Curaleaf, Green Thumb
Morningstar wrote that Curaleaf and Green Thumb already operate in the medical markets of New Jersey and New York and new adult-use legislation in these states sets them up for a future sales surge. Curaleaf has a buy rating and a $21 target price. The stock was lately selling at $12.47. The revenue for 2021 is forecast to reach $1.1 billion. Green Thumb also has a buy rating and a target price of $46. The stock was recently selling at $29. The revenue for 2021 is forecast to hit $877 million.
Optimism for federal legalization has risen rapidly after Biden won the presidential election. Sens. Cory Booker (New Jersey), Chuck Schumer (New York), and Ron Wyden (Oregon) have introduced new legislation to fully legalize cannabis, but it doesn’t look like the votes are in place to pass it. The chance of banking legislation is more likely and even that is tenuous. “In our discussions with banking regulatory officers, they think that a safe harbor statement might not be enough. They believe that a truly effective banking bill would need to come with a detailed and robust regulatory framework to minimize the uncertainty and risk for banks. Assuming the bill goes far enough, the benefits for U.S. MSOs could be meaningful.”