The past year has been a tough one for publicly traded cannabis companies, particularly multi-state operators in the United States, many of whom have seen their valuations drop to a quarter of their early 2019 highs. This decline in value coupled with the current Covid-19 virus-fueled economic downturn has many investors sitting on the sidelines. But a host of factors are brewing that could cause a powerful tailwind for the U.S. cannabis industry…
Many U.S. operators, particularly those with a strong focus on operating fundamentals, have already started to see their valuations rebound off the lows from late 2019 and early 2020. But these companies should still have lots of room to grow. In fact, a strong argument can be made that many American cannabis stocks are attractively valued compared to their current and anticipated long-term growth rates.
American cannabis company valuations also continue to lag their peers in Canada, despite what’s demonstrably better recent operational and financial performance and clear sight lines in larger addressable markets. Canada has already legalized cannabis nationwide, and while implementation has been slow and rocky, it is no longer in its initial phases. In a country of only 37 million people, Canadian cannabis companies like Canopy Growth and Aurora must rely on nascent international markets to substantially grow their revenue, while in the U.S., only 11 of 50 states have legalized for adult use and cannabis remains a Schedule I controlled substance at the federal level, leaving lots of room for growth and expansion at home in a country with nearly ten times Canada’s population.
Perhaps most importantly, the fundamentals of the top U.S. cannabis companies are strengthening almost across the board, despite the American and global economies being rocked by the coronavirus pandemic and the ensuing economic downturn. Market leading operators like Green Thumb Industries, Curaleaf and Trulieve are all expected to surpass $100 million in quarterly revenue in Q2 of 2020, marking the first time that three U.S. companies will pass this milestone. Even mid-sized multi-state operators, like my own company 4Front, have reported meaningful revenue increases over the past six months.
Notably, these revenue increases have happened in the industry despite the general economic downturn with states across the country reporting record cannabis sales. The most recent state to legalize, Illinois, recently reported record monthly sales of $47.6 million in June, marking the fourth straight month of sales growth, all during the pandemic. Sales in five western states (Arizona, California, Colorado, Nevada, and Oregon) have also continued to grow, with total sales across those states up 14% from $644.9 million in April to $735.4 million in May.
This looks to be answering a popular question about the cannabis economy: How would it hold up during an economic downturn? While alcohol has long been seen as a recession-proof industry, cannabis only became legal in Colorado and Washington in 2012, so until now there has been no reliable data to show how cannabis sales may fare in a down economy. The sales data for the first four months of the Covid-19-fueled downturn seem to indicate the same is likely true for cannabis, as it is proving to be a consumer staple. For investors looking for a relatively safe investment during what could be a prolonged recession or depression, cannabis stocks may be one of the smarter plays in the market today.
This is not to say that all American cannabis companies are without risk, as well publicized troubles plaguing…
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