In an article published yesterday, we discussed how a tie-breaking Democratic majority in the U.S. Senate won’t be enough to legalize cannabis at a federal level. Despite this, Morningstar analyst Kristoffer Inton notes that the market has been optimistic about the potential of legalization, which has resulted in big surges for U.S. cannabis producers.
“Interestingly, most of the producers to benefit from this market optimism have been Canadian, which mostly wouldn’t be materially affected by changes in the United States; it’s U.S. producers that would see the most benefit from legalization,” he says.
Despite this, however, Canadian Cannabis companies are among the cheapest in our coverage universe, comprising four of the five cheapest, and Inton thinks U.S. producers are a better play than their Canadian counterparts.
“Even without federal legalization, U.S. cannabis producers enjoy an additional revenue growth tailwind compared with Canadian ones. Both markets can expand from new customers and dispensaries in existing markets as well as an increase in share of wallet; however, U.S. cannabis also enjoys the growth from more states legalizing,” he says.
He adds that though the road to U.S. federal legalization remains uncertain, investors can still find opportunities along the way.
“There is still value to be found in Canadian stocks, but less so than in U.S. ones. We note 3-star Aurora Cannabis (ACB) with a price/fair value of 0.84 and 4-star Canopy Growth (WEED) with a price/fair value of 0.71. Also, although they do have direct operations, Canopy and Cronos offer investors some investment exposure to the U.S. THC market through standing deals to acquire stakes in U.S. producers upon a change in federal law,” Inton says.
Here is the list of the cheapest Canadian cannabis stocks:
|
Name |
Ticker |
Fair Value Uncertainty |
Fair Value Estimate |
|
Very High |
0.57 |
||
|
Very High |
0.61 |
||
|
Very High |
0.68 |
||
|
Extreme |
0.82 |
The cheapest of the stocks is Curaleaf (CURA) trading at a discount of over 40%. Curaleaf cultivates and sells cannabis in the U.S. with a presence in 23 states, including the acquisitions of Cura Select and Grassroots. Unlike the Canadian cannabis producers, Curaleaf is much more vertically integrated with over 20 cultivation sites, more than 30 processing sites, and over 100 dispensaries. It gives investors full exposure to the U.S. cannabis market, the fastest growing and largest potential market. And it’s not just the U.S., Curaleaf also has its eyes on a global stage. In March 2021, it acquired European cannabis company EMMAC Life Sciences.
“Although relatively small, the acquisition is the beginning of Curaleaf's efforts to serve the lucrative European market, competing with major Canadian cannabis cultivators. Exporters must pass strict regulations to enter markets, which protects early entrants like the Canadian companies. EMMAC produces in Portugal, giving Curaleaf low-cost production to compete in the global medical cannabis market,” Inton says.
In America, Curaleaf has developed its footprint focusing on states with large populations and limited licenses, such as Massachusetts, New York, New Jersey, and Florida. Historically, Curaleaf has been primarily focused on the medical cannabis market; however, in May 2019, Curaleaf acquired Cura Partners. The acquisition expanded Curaleaf’s standalone East Coast-heavy, medical cannabis-focused business with Cura Partners’ West Coast-heavy, recreational cannabis-focused business. In July 2020, Curaleaf completed its acquisition of Grassroots and expanded its footprint, particularly in the Midwest.
“We think the U.S. market has the highest total potential and offers the largest growth of any market. Yet, the U.S. regulatory environment remains murky, with individual states legalizing recreational or medical cannabis while it remains illegal federally. However, we expect that federal law will be changed to allow states to choose cannabis’s legality within their borders. Based on our state-by-state analysis of cannabis legalization, we forecast nearly 25% average annual growth for the U.S. recreational market and nearly 15% for the medical market,” Inton says.
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