The Cannabis MSOs Offering Growth at Value Prices
We’ve been dealing with a bifurcated market for most of 2020.
The Vanguard Growth ETF (NYSE: VUG) has left the Vanguard Value ETF (NYSE: VTV) by the side of the road.
We are seeing bifurcation not only at the broadest level but also at the sector-specific level. And the divergence for one industry is about to get a lot wider. The great thing about this is that it offers both value and growth.
Back in the Black… Market
Last week, the Canadian cannabis sector was pushed lower.
It’s already been a difficult year for the group. In fact, the Horizons Marijuana Life Sciences Index ETF (OTC: HMLSF) has slid more than 34.5% in 2020.
But the most recent catalyst is also a familiar villain: abysmal earnings by Aurora Cannabis (NYSE: ACB).
This added more downward force to a group of companies already under pressure for months.
Aurora reported a 4.5% sequential decline in sales to CA$72.11 million. That was better than expected. But it forecast next quarter’s sales to be between CA$60 million and CA$64 million. At the midpoint, that’s not only a 14% sequential decline but also well below the CA$79.6 million analysts had forecast.
Shares of Aurora tumbled 29.4% on the report and have since set new 52-week lows.
Even worse, the undertow pulled down Aphria (Nasdaq: APHA), Canopy Growth (NYSE: CGC), Cronos Group (Nasdaq: CRON), Tilray (Nasdaq: TLRY) and the rest of the major Canadian licensed producers too.
And now the only Canadian major posting a positive return since the end of June is Aphria.
Aurora warned that the illicit market was back in force, eating away at its market position.
As we’ve heard from industry insiders here previously, the pandemic not only disrupted brick-and-mortar and traditional businesses, but apparently also derailed the illegal market, both in Canada and in the U.S.
But just as we’ve seen across a number of industries, the black market has recovered.
I’ve long considered Canadian cannabis companies the blue chips of the industry. They have the largest global footprints, but the glory days of explosive growth are waning. And most of them don’t offer attractive valuations at the moment.
But for cannabis investors, it isn’t all lemons. There’s still a market booming… poised to get even bigger and alight with growth.
$9 Billion Election Night
When the prospect of legal cannabis investing materialized, our initial focus was on Canada.
That was all the way back in 2017, when national legalization was looming for the country the following year.
But then in 2019, we turned our attention southward, to the United States.
Admittedly, last year was a tough one for American multistate operators (MSOs), as well as Canadian licensed producers.
But the fortunes have flipped – Canadian cannabis companies are overvalued compared with their total market size. Yet their U.S. counterparts are still considerably cheaper than the $80 billion opportunity.
And while Canadian cannabis has struggled, several American MSOs have just come off new 52-week highs.
We’ve also seen Curaleaf Holdings (OTC: CURLF), Green Thumb Industries (OTC: GTBIF) and Trulieve Cannabis (OTC: TCNNF) become the first cannabis companies to report $100 million in quarterly revenue.
Next quarter, Curaleaf is projected to report more than $200 million in quarterly sales! A record for the industry by far.
And with Arizona, Mississippi, Montana, New Jersey and South Dakota having legalization ballot measures voted on in November, the U.S. market is poised to get even larger.
In fact, projections are for $9 billion in new revenue between 2022 and 2025 if all five states greenlight their new or expanded legalization measures.
Plus, if Democrats take the Senate, U.S. federal legalization is almost assured – regardless of who wins the White House.
The Democrat-controlled U.S. House of Representatives has already passed historic cannabis legislation, like the Secure and Fair Enforcement (SAFE) Banking Act. But those efforts have been cast into procedural purgatory in the Republican-controlled Senate.
At the moment, Canadian cannabis looks sickly as losses are racking up and revenue growth is stalling, or falling, at major names. But in the U.S., the industry has been far more resilient, and the outlook is exceedingly bright. Not to mention, there is potential for a major updraft on election night.
American MSOs are outpacing their Canadian competitors in 2020. And I expect that to continue well into 2021 and beyond. They’re offering fantastic growth at value prices.
That’s a combination that’s difficult to beat.
Here’s to high returns,
Marijuana Legalization: U.S. Companies Start to Break Out
October 13, 2020