Major stock exchanges have, for the most part, taken tough stances on marijuana companies operating in the U.S. Up until recently, you wouldn't have found a multi-state operator (MSO) trading on a top exchange due to the federal ban in the U.S.
But that appears to be changing. One MSO recently moved onto the Toronto Stock Exchange (TSX), and another one may soon end up there.
Curaleaf heading for the TSX?
On Oct. 10, New York-based cannabis company Curaleaf Holdings (CURLF 5.26%) announced that it submitted its application to list on the TSX. Executive Chairman Boris Jordan says he believes that there will be multiple benefits from trading on the exchange, such as having access to a wider pool of investors and reducing volatility.
Earlier this year, Ontario, Canada-based TerrAscend, another MSO, became the first such plant-touching cannabis business (meaning it's a grower, processor, or distributor, for example) to make the move onto the TSX.
Why other U.S. pot stocks could follow
U.S. marijuana stocks have typically traded on the over-the-counter exchange and on the Canadian Securities Exchange (CSE), which is not nearly as liquid or popular as the TSX. That's because the TSX and other exchanges have shunned these stocks due to U.S. federal ban on pot. In the past, the TSX has even sent out warning letters to Canadian-based marijuana stocks simply for having interests in the U.S. cannabis market.
Although it isn't clear why there is a change in policy now, the TSX's doors appear to be open for U.S. pot stocks. The first sign of such a change was last year when Canopy Growth, which also is based in Ontario, announced plans for the creation of Canopy USA, a special purpose vehicle that would house its U.S. cannabis investments (TerrAscend is one company that Canopy Growth has an option to acquire shares in).
Nasdaq has objected to Canopy Growth's plans to consolidate U.S. marijuana businesses within its results, but the TSX indicated it was OK with the plans.
With TerrAscend making the move to the TSX and Curaleaf potentially being the next MSO to do so, it wouldn't be surprising to see other marijuana stocks make the move from the CSE to the TSX. One big benefit could be a higher valuation.
U.S. pot stocks should be trading at far higher revenue multiples than their Canadian counterparts
One discrepancy that I've observed in the past is that despite having faster-growing operations and better near-term growth prospects, U.S. cannabis stocks have traded at lower revenue multiples than Canadian pot stocks. As Canadian pot stocks have fallen sharply in value this year, that dynamic has changed, but U.S.-based stocks don't exactly trade at a premium.
Data source: YCharts
Florida-based Trulieve Cannabis, for instance, trades at a fairly low multiple of revenue compared to its peers. And when you look at the overall trajectories of these businesses in recent years, it makes even less sense to be paying more for Canadian pot stocks than these U.S.-based businesses.
If Curaleaf and other MSOs make the jump to the TSX, giving investors more cannabis stocks to choose from on that exchange, that could lead to an rise in some of these multiples. Ironically, Canopy Growth, which might have helped drive the TSX to loosen its restrictions on U.S.-based marijuana investments, could suffer the most if its investors jump ship over to MSOs.
Is now the time to buy U.S. pot stocks?
Moving up to the TSX is no small move for Curaleaf. Although it's not on the Nasdaq, by being available to more investors and funds, that could drive up its valuation.
U.S. pot stocks provide better growth opportunities for investors than Canadian pot stocks and should make for better investments in the long run. There is still risk there for investors given the federal ban on marijuana in the U.S., but if you're willing to hang on to these stocks, they could make for good long-term growth investments.
