U.S. firms in the cannabis market.
There's no question the launch of the Canadian recreational cannabis market hasn't gone according to plan for cannabis stock investors. Revenue growth has disappointed, and losses have been larger than anticipated. Most of the most popular U.S.-listed Canadian cannabis stocks have tanked, leaving investors with a bad taste in their mouth. However, while Canada continues to struggle, Cantor Fitzgerald analyst Pablo Zuanic recently initiated coverage of U.S. multistate operators, or MSOs. These companies aren't listed on major exchanges and operate only in states that have legalized cannabis. Here are eight under-the-radar U.S. cannabis stocks Zuanic discussed.
Cresco Labs (CRLBF)
Cresco Labs is one of Zuanic's top two MSO stock picks and holds a leading 25% market share of the key Illinois and Pennsylvania markets. While Canada's growth has consistently disappointed analysts, Zuanic says both the Illinois and Pennsylvania markets are outpacing consensus growth expectations. He says Cresco's positioning in those markets provides an opportunity to expand into wholesale over time, and its healthy balance sheet gives it the financial flexibility to grow and adapt. Cresco is expanding its business from five states to 10 in 2020. Cantor Fitzgerald has a "buy" rating and $12 price target for CRLBF stock.
Trulieve Corp. (TCNNF)
Trulieve is both the largest operator in Florida and the most profitable U.S. MSO. Profits are hard to come by these days in the cannabis business, but Zuanic says Trulieve generates the best margins within the MSO group. While other MSOs are drowning in debt attempting to expand their businesses to additional states, Trulieve is focusing on building the largest store network within Florida. It now has about a 50% share of the state's medical cannabis market. Cantor Fitzgerald has a "buy" rating and a $30 price target for TCNNF stock.
Curaleaf is the largest U.S. MSO with a market cap of around $2.9 billion. Upon completion of two pending merger deals with Select and Grassroots, Curaleaf will own 74 stores and 25 cultivation facilities and have licenses for 131 total stores. It will also operate in 19 U.S. states. Curaleaf is already cash-flow positive, and management has said its 2020 growth plans are fully funded. Unfortunately, Zuanic says Curaleaf shares have limited upside from their current valuation in the near term. Cantor Fitzgerald has a "neutral" rating and $8.60 price target for CURLF stock.
Green Thumb Industries (GTBIF)
Green Thumb Industries is one of the largest MSOs and operates in 12 different states. Zuanic says that Green Thumb's geographic presence creates growth opportunities, but it also stretches the company's limited resources thin. Green Thumb could get a boost from its medicinal-only states like New Jersey legalizing recreational cannabis. However, Zuanic says the company's minimal penetration into attractive states limits its opportunities in the near term. Despite execution and balance sheet risks, Zuanic says the stock has one of the fullest valuations of the group. Cantor Fitzgerald has a "neutral" rating and $13 price target for GTBIF stock.
Harvest Health & Recreation (HRVSF)
Harvest Health & Recreation generates more than half its sales in Arizona, and two-thirds of its revenue comes from selling third-party brands. Zuanic says Harvest shares are overvalued based on the company's current business, but it has potential catalysts ahead that could change that risk-reward skew. He says Harvest's pending merger with Verano Holdings could be a significant growth driver given the company is profitable and has an excellent position in Illinois. Recreational legalization in Arizona could also be a major demand tailwind. Cantor Fitzgerald has a "neutral" rating and $4 price target for HRVSF stock.
Acreage Holdings (ACRGF)
Acreage Holdings is a unique investment among MSOs given its buyout deal with Canopy Growth Corp (CGC). Last year, Canopy announced a $3.4 billion buyout of Acreage contingent upon the U.S. lifting the federal ban on cannabis. Zuanic says the deal makes Acreage more of an arbitrage play than a growth investment given the value of Acreage shares are tied closely to the value of Canopy shares. Each Acreage share is converted to 0.5818 shares of Canopy if the deal is ultimately completed. Cantor Fitzgerald has a "neutral" rating and $7.10 price target for ACRGF stock.
AYR Strategies (AYRSF)
AYR Strategies owns dispensary assets in Nevada and a medical cannabis business in Massachusetts. Zuanic says the company has some of the highest profit margins in the MSO group, especially considering its early-stage business. While many peers will have to raise money to expand, AYR management says it can fund its growth via operating cash flow. AYR shares trade at an attractive valuation, but Zuanic says regulatory delays in Massachusetts, as well as production capacity limitations could be headwinds for the stock in the near term. Cantor Fitzgerald has a "neutral" rating and $11 price target for AYRSF stock.
iAnthus Capital Holdings (ITHUF)
Zuanic says iAnthus Capital Holdings is one of the fastest-growing MSOs, but its challenged balance sheet subjects investors to significant dilution risks. The company operates primarily in Arizona, Florida, Maryland, Nevada and Massachusetts. In September, iAnthus announced a $100 million financing plan to support its efforts to establish positions in New York and New Jersey and grow capacity in Florida and Massachusetts. However, Zuanic says the company's fully diluted pro forma share count of 283 million is 50% higher than its outstanding share count of 189 million. Cantor Fitzgerald has a "neutral" rating and $1.30 price target for ITHUF stock.
U.S. cannabis stocks poised to grow:
-- Cresco Labs (CRLBF)
-- Trulieve (TCNNF)
-- Curaleaf (CURLF)
-- Green Thumb Industries (GTBIF)
-- Harvest Health & Recreation (HRVSF)
-- Acreage Holdings (ACRGF)
-- AYR Strategies (AYRSF)
-- iAnthus Capital Holdings (ITHUF)
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