Perhaps it's no coincidence that cannabis plants are green, because it's an industry that's expected to show investors the green over the long run. After producing nearly $11 billion in legal worldwide sales last year, the global pot industry could grow to $200 billion a year in sales by the turn of the following decade.
The big question continues to be: What marijuana stocks to buy?
Most investors have been attracted to our neighbor to the north, because Canada became the first industrialized country in the world to legalize recreational pot in October 2018. However, it's the United States that could run circles around Canada in terms of peak annual sales. Even without federal legalization, state-level approvals are allowing U.S. cannabis sales to handily surpass Canadian pot revenue. That makes the United States the crown jewel of the marijuana movement, and it should give U.S. pot stocks priority for investors.
These U.S. marijuana stocks are Canaccord Genuity's top picks
With this in mind, 69-year-old investment bank Canaccord Genuity released a research note last week detailing three U.S. pot stocks that it believes are bargains in the vertically integrated multistate operator space -- this is a fancy phrase to describe multistate dispensary operators.
According to Canaccord and covering analyst Matt Bottomley, the shellacking U.S. multistate operators have taken recently is primarily tied to delays in announced acquisitions. These delays are mostly the result of the U.S. Justice Department analyzing possible antitrust issues, which is a new foray for the agency given that cannabis remains illegal at the federal level. Bottomley does note that a number of the deals currently being held up are expected to begin closing by October.
More specifically, Canaccord and Bottomley approve of the attractive valuations in the multistate operator (MSO) space, with the average U.S. MSO trading at a multiple of 7.9 times 2020 estimated enterprise value to EBITDA, compared to Canadian growers valued at around 20 times estimated enterprise value to EBITDA. Said Bottomley in his firm's research note:
Valuations remain attractive relative to Canadian peers. As MSOs on average have access to a greater population base than in Canada, are able to operate more favorable vertically integrated operations in many states, and are closer to achieving (or have achieved) profitability compared to most Canadian LPs [licensed producers], we believe this valuation gap will eventually close.
Bottomley and his team wound up singling out three U.S. pot stocks that look attractive.
Canaccord's top pick in the MSO space is Curaleaf Holdings (CURLF 4.06%), which has announced not one but two major acquisitions this year. In late April, Curaleaf announced the acquisition of Cura Partners, owners of the Select cannabis brand. Then, in mid-July, Curaleaf announced a cash-and-stock deal to buy privately held MSO Grassroots for the tidy sum of $871 million.
The Grassroots deal should be particularly transformative for Curaleaf. It'll nearly double the number of retail licenses held by the company to 131 from 70, as well as increase the number of states Curaleaf will be operating in from 12 to 19. Although Curaleaf isn't the top dog in terms of retail licenses held or total states that it's operating in, it does have more operational stores right now than any other dispensary operator on a pro forma basis -- and it's not even close. Curaleaf also expects to be the leading dispensary operator in California, a state expected to account for a quarter of all legal U.S. weed sales by 2024.
Curaleaf also looks as if it'll be the first publicly traded pot stock in the world to reach the psychologically important $1 billion level in annual sales. During the company's second-quarter conference call, Curaleaf's executives called for between $1 billion and $1.2 billion in full-year sales in 2020.
For what it's worth, Canaccord singled out Curaleaf's geographic exposure and size as reasons why it deserves a premium relative to its peers.
Next up, Bottomley and his team pointed to Cresco Labs (CRLBF 8.11%) as being attractive. Cresco is currently in the process of acquiring Origin House (ORHOF) in an all-stock deal that's awaiting approval from the antitrust division of the U.S. Justice Department.
On the surface, Cresco Labs probably looks pretty pedestrian with "only" 56 retail licenses and access to 11 states, on a pro forma basis. By comparison, there are more than a half-dozen pot stocks with more retail licenses at their disposal (again, pro forma).
However, Cresco's acquisition of Origin House should be a game changer. That's because Origin House has one of a select few cannabis distribution licenses in California, thereby giving Cresco access to sell its branded pot products in more than 500 California dispensaries. This would also increase Cresco's dispensary exposure to more than 700 nationwide, once this deal closes. And, as noted, California is the most lucrative marijuana market by sales in the country.
Although Cresco Labs is playing second fiddle to Curaleaf for the time being, it's one of the few publicly traded pot stocks liable to generate higher full-year sales in 2020 than Canadian kingpins Canopy Growth and Aurora Cannabis.
Harvest Health & Recreation
Lastly, Bottomley and his team at Canaccord Genuity also favor Harvest Health & Recreation (HRVSF). Harvest Health has made a bounty of acquisitions in recent months, with the largest being the all-stock deal to buy privately held Verano Holdings for $850 million (when announced).
Although Harvest Health trails its peers in terms of currently operating retail locations, it has what's arguably the biggest arsenal of licenses of the entire MSO space. It currently leads all vertically integrated operators with 135 retail licenses, and has more than 210 licenses inclusive of processing sites and growing facilities spanning 18 states. Legalized states haven't exactly been the quickest when it comes to reviewing and approving cultivation, processing, and sales licenses, so the mere fact that Harvest Health is sitting atop this treasure trove of licenses is a great sign with regard to its ability to quickly expand.
Perhaps the only concern here is that Harvest Health burned through more than half of its cash and cash equivalents in the first six months of 2019. With plenty of licenses, but a bounty of retail stores to open and remodel, I find it very likely that Harvest Health will turn to dilutive common stock offerings to raise capital in order to fund its aggressive expansion plans.