Even though the cannabis business has been around for a very long time, at least in illicit form, investors may forget that marijuana is still a nascent industry. There is no precedent to draw upon of an industrialized country legalizing weed, which means there's been a learning curve for investors, the companies involved, and even Wall Street since Canada allowed the recreational use of marijuana.

Over the past year, a number of Wall Street investment firms have begun throwing their hats in the ring on the cannabis industry, though many have done so cautiously. This past week, Ladenburg Thalmann became the latest Wall Street firm to initiate coverage on the cannabis industry. In total, covering analyst Glenn Mattson started three pot stocks with a buy rating.

A gloved processor using scissors to trim a cannabis flower.

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Canopy Growth

Perhaps one of the biggest surprises is Mattson's and his firm's conviction that Canopy Growth (NYSE:CGC), the largest marijuana stock in the world by market cap, is a buy. Ladenburg Thalmann started Canopy with a $50 target, which implies upside of more than 40% from current levels.

What impressed Mattson and his team about Canopy Growth is the company's aggressive and well-defined push into the U.S. market, as well as its bountiful balance sheet, which is supported by billions of dollars in cash as a result of a large equity investment from Modelo and Corona beer maker Constellation Brands that closed in November. This cash balance gives Canopy more financial flexibility than any other pot stock to execute on its long-term business strategy and expansion. 

As you may know, Canopy Growth was awarded a hemp-processing license in New York state in January, acquired Colorado-based cannabis and hemp intellectual property company ebbu in November, and has the contingent rights to acquire multistate operator Acreage Holdings (OTC:ACRGF) for $3.4 billion if the U.S. federal government legalizes marijuana.

What makes this buy rating so surprising is that it comes less than a month after Canopy Growth reported a whopping 670 million Canadian dollar net loss for fiscal 2019, and two weeks after visionary co-CEO Bruce Linton was fired. With profitability perhaps two or more years off, Mattson's take on Canopy appears aggressive, at least in the near-to-intermediate term.

A large sign with a cannabis leaf and the word dispensary written underneath it.

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Acreage Holdings

Perhaps it comes as little surprise that Ladenburg Thalmann also views Acreage Holdings as a buy, with a price target of $18, representing upside of more than 30% from current levels.

The thesis here is twofold. First, Mattson's research note to clients points out that Acreage Holdings has a "solid position" in the U.S. to take advantage of the budding cannabis industry. Right now, Acreage has a cultivation, processing, and/or sales presence in 20 states (on a pro forma basis), which is more than any other vertically integrated dispensary operator. It also holds close to 90 retail licenses, placing it among the top five in the U.S. in terms of dispensaries that can eventually be opened.

The second reason to buy, according to Mattson, is that Acreage Holdings is trading at a significant discount to its share-based conversion if the contingent deal with Canopy Growth were to come to fruition. Acreage shareholders get $300 million in up-front cash as part of that deal, with the remainder being funded with Canopy's stock. Ladenburg Thalmann implies that there's a good chance of legalization occurring within the 90-month window of the contingent-rights offer.  

Although legalization is a very real possibility in the U.S. over the next seven-plus years, it's not a strong possibility before 2021 with Republicans controlling the Senate. Furthermore, even with robust sales growth potential, profit projections for Acreage have been declining for 2019 and 2020 as high tax rates in the U.S. fuel a persistent black market.

Clear jars filled to the brim with dried cannabis buds.

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Aurora Cannabis

Considering that Ladenburg Thalmann's and Mattson's take on the industry focuses on long-term value creation and market-share gains, perhaps it's no surprise that Aurora Cannabis (NYSE:ACB) is the third pot stock labeled as a buy. Aurora was affixed a price target of $9, which implies upside of more than 30%.

Mattson is drawn to Aurora because of its aggressive capacity expansion both within and outside Canada. Despite concerns of domestic oversupply, Mattson commends Aurora's push to grow more pot given Canada's inability to meet domestic demand. 

AS a refresher, Aurora Cannabis currently leads all producers with an annual run rate of 150,000 kilos a year, and projects to yield at least 625,000 kilos a year by the end of fiscal 2020 (June 30, 2020). With few exceptions, no other pot stock can hold a candle to Aurora when it comes to production.

With a presence in 25 countries, including Canada, Aurora has staked its claim to cannabis's global dominance. If and when the domestic market becomes oversupplied with marijuana, these international markets will act as channels for Aurora to offload its production.

But, as with Mattson's other picks, there are risks. Namely, Aurora's aggressive expansion has yielded an insane amount of share-based dilution. Additionally, Aurora's overseas business could struggle to thrive until domestic demand is satiated, which could take years.

A man in a suit holding up his hands as if to say no thanks.

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The one marijuana stock that isn't a buy

However, not every cannabis stock is worth buying in the eyes of Mattson. Ladenburg Thalmann  initiated popular pot stock Tilray (NASDAQ:TLRY) with a neutral rating.

The lack of love for Tilray derives from its March acquisition of Manitoba Harvest, a hemp-based foods company with a North American distribution network of more than 16,000 retail locations. Mattson suggests that most of Tilray's near-term growth will come from this purchase, and that an organic-food company doesn't deserve the same multiple as a cannabis company: 

"It remains to be seen what kind of traction TLRY will have with CBD [cannabidiol] in the U.S. and until then we don't believe an established organic foods company should trade at the same multiple as a high-growth cannabis company."

The company's CEO, Brendan Kennedy, announced in March that Tilray would be focusing future investments on Europe and the U.S., as opposed to Canada. This strategy shift likely means pushing profitability further down the road, which makes Tilray an increasingly risky investment.