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)—were once poised to outperform their Canadian rivals. As sales of legal cannabis were growing at a rate of more than 20% per year, according to Compass Point Research & Trading, a 2019 article by Barron’s marked the American companies as ones to watch.
Despite marijuana still being illegal under federal law, the cannabis market is growing in the U.S. as an increasing number of states legalize the substance. New Jersey, Arizona, South Dakota, and Montana were the latest states to legalize marijuana in the November 2020 election. In fact, a majority of the world’s legal sales of the drug take place in the U.S., 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. (HEXO)—combine for a total market cap of more than $14 billion, whereas America’s top five are close behind for a total of close to $12.9 billion, as of Nov. 2020.
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 the early stages of the growth life cycle and have not yet reached a mature stage of more stable profitability, sales are 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.
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, bringing the total number of states that have legalized marijuana use in some form to 35 states and the District of Columbia.