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How to play U.S. cannabis

The lack of federal legalization isn’t stopping these giants from unlocking massive growth in the states

Andrew Willis 4 February, 2020 | 1:05AM
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Andrew Willis: While Canada was collecting all the attention of cannabis investors looking to take advantage of legalization, the seeds of a sizeable marketplace were being planted down South.  

Sector analyst Kristoffer Inton says that unlike in Canada, where we’ve had slow progress in retail expansion and value-added product offerings, the U.S. has been fast to deploy at the state level with a full offering of products – edibles and all. Illinois’s recent legalization saw $20 million dollars in sales within the first two weeks.

U.S. cannabis companies, especially U.S. MSOs, or “multi-state operators”, are riding this wave of legalization at the state level that Inton expects to continue. So far 23 states have legalized medical cannabis and 11 have legalized recreational cannabis.

Other catalysts to keep an eye on, Inton says, is a high probability of the passing of the SAFE Banking Act, which will allow cannabis companies to open bank accounts and accept credit cards. And a medium probability of passing the STATES Act, which would leave cannabis legislation to individual states.

Inton is optimistic about these developments as they have bi-partisan support, but he says investors hoping for full federal legalization may have to wait a few years.

While U.S. cannabis companies have been restricted to state-level expansion, Canadian cannabis have been able to go beyond borders and form powerful international partnerships with other industry leaders.  

Inton says that at the moment, a bet on U.S. cannabis companies is a vertical play, and that’s okay. There’s comfort for investors in the consistency of strategies to expand and acquire up the value chain, from farm to store. Inton does say that U.S. companies will be quite a bit behind when it comes to catching up in the international arena.

But that might not matter so much with a massive American marketplace. There’s plenty of room to grow in a market that we expect to be 13 times larger by 2030.

Now, many Canadian cannabis companies have been dipping their toes in the U.S. market, but their exposures pale in comparison to U.S. pure-plays, such as our five-star favourite Curaleaf (CURA).

With a market cap of $4.17 billion, Curaleaf has the capital to continue expanding its coast to coast footprint, and it’s posted impressive Q3 revenue growth and margin expansion. For cannabis investors looking at opportunities in that we see as the largest market in the world by potential sales, it may be well worth an all-American approach.

For Morningstar, I’m Andrew Willis

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Andrew Willis

Andrew Willis  is Content Editor for Morningstar.ca. Follow him on Twitter @AndrewWillisCDN.

 

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