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As the cannabis market continues to mature and industry metrics solidify, the US investment landscape could gain an edge in the new year.
In the aftermath of a realignment in resources and tumultuous times for the Canadian names that first popularized the cannabis investment possibility, much is up in the air when it comes to winners and losers in the still-developing cannabis space.
What awaits cannabis investors in 2021 following the turmoil of a year riddled with the effects of a global pandemic? Here the Investing News Network (INN) presents an overview of what experts and company executives see coming for the cannabis industry in the 2021 operating year.
Cannabis outlook 2021: Could US names surpass Canadian operators?
Speaking about the growing divide between Canadian and American cannabis stocks, Charles Taerk, president and CEO of Faircourt Asset Management, said it’s becoming increasingly difficult for Canadian companies to maintain their edge.
“When you look at a US company, you’re getting good performance that more closely relates to fundamental performance and operations,” he explained. “There’s growing cash flow, there’s growing revenue, there’s a growing market.”
According to Taerk, who co-manages the Ninepoint Alternative Health Fund, some of the biggest Canadian cannabis names trade at over 20 times enterprise value to 2021 EBITDA, whereas their American counterparts do so at 16 times.
What’s more, US-based operations in the public markets are trading in line with fundamental performance-based metrics, and those numbers are only expected to grow as additional state markets come online — meaning potentially higher volumes for these companies.
New Jersey was one of five new US state markets to be approved by voters back in the November federal election. This regulatory win will give the state access to recreational cannabis, but is widely expected to carry a bigger weight than that.
Several experts have discussed the impact that New Jersey’s legalization plan could have on nearby states like New York and Pennsylvania; they have active medical cannabis markets, but now may evaluate and pursue recreational programs sooner rather than later.
“We think approval by New Jersey voters will be a catalyst for coordination with New York, Connecticut and Pennsylvania, creating an adult-use region with a population of nearly 45 million people,” said Anthony Coniglio, CEO of NewLake Capital, an investment operation targeting real estate assets for a portfolio based on industrial and retail properties in the cannabis industry.
Dan Ahrens, managing director and chief operating officer at AdvisorShares, told INN that 2021 will be defined as the year in which US cannabis investments officially surpass Canadian options as “greatly superior” in the eyes of investors. Ahrens manages the AdvisorShares Pure US Cannabis ETF (ARCA:MSOS) and the AdvisorShares Pure Cannabis ETF (ARCA:YOLO).
Despite the excitement over the continued growth of state markets in the US, experts do not expect any kind of sweeping legalization in the vein of the Canadian market in the near future.
Even so, Kris Krane, president at 4Front Ventures (CSE:FFNT,OTCQX:FFNTF), said a Joe Biden administration will be friendlier to the business of cannabis. Similarly, one investment expert told INN that the possibility of federal legalization discussions could be enough to provoke the entry of investors who are still biding their time.
“The possibility of cannabis reform at a federal level will vastly improve economics of US operators and bring in investors salivating on the sidelines,” said Nawan Butt, portfolio manager at Purpose Investments and co-manager of the Purpose Marijuana Opportunities Fund (NEO:MJJ).
SLANG Worldwide (CSE:SLNG,OTCQB:SLGWF) President and CEO Chris Driessen told INN he expects 2021 to be a monumental year for cannabis investments in the US.
“There will be more capital available as more institutional investors get comfortable and come into the space,” Driessen said.
The executive said he expects metrics to continue shifting and anticipates that the idea of profit as a leading measuring stick will soon be challenged. “It’s my belief that those with scale and ability to generate profit will be the most talked about names in the future,” he said.
Cannabis outlook 2021: What’s at stake for Canadian investments?
2020 served as a year of introspection for a number of Canadian companies and their investors. While the long-term future of the plays available to Canadian operators is yet to be determined, the entire sector was forced to deal with rightsizing or strategy adjustments.
“There are only very few companies that are able to generate positive EBITDA … and I think that’s something that’s going to linger in 2021,” said Taerk. “Canada’s rightsizing is the big thing here.”
Jesse McConnell, co-founder and CEO of Rubicon Organics (TSXV:ROMJ,OTCQX:ROMJF), told INN that 2021 is set to bring the expansion of retail availability across the country, which will increase the total addressable market and make circumstances better overall.
On top of the much-requested additional store options, McConnell is confident about the impact that greater product variety will have for his company. The executive said Rubicon Organics soon expects to launch concentrate products, as well as vape and topical products.
“We think as more of these derivative products are available, it will be very good for the legal market,” McConnell said.
Butt shared McConnell’s enthusiasm for more stores, particularly in Ontario. The expert also expects to see a reduced price point for products in 2021 to allow the increase in sales to create a meaningful market appreciation.
Cannabis outlook 2021: What lies beyond North America for investors?
While investor attention has so far mostly centered on the growth of the Canadian and American cannabis markets, 2021 appears poised to offer a bigger platform for international opportunities.
“In 2021 we expect the global marketplace to continue to grow in demand for cannabinoid extracts,” David Gordon, chief corporate officer at Colombian producer PharmaCielo (TSXV:PCLO,OTCQX:PCLOF), told INN.
Similarly, Jordan Lewis, CEO of privately held Uruguay-based cannabis producer Fotmer Life Sciences, is bullish on the development of Latin America as a vibrant cannabis market — particularly within the region itself.
“We expect an increase in exports to the European market, mainly from Uruguay and Colombia, and an increase in business deals between Latin American countries as local markets develop,” Lewis said.
One Canada-based investment expert told INN he expects the global market to go as far as the US growth will take it.
“The growth of the global cannabis market is effectively largely dependent on the growth of the US market,” said Mark Noble, executive vice president of ETF strategy at Horizons ETFs (Canada), which provides the Horizons Marijuana Life Sciences Index ETF (TSX:HHMJ) and Horizons US Marijuana Index ETF (NEO:HMUS).
Cannabis outlook 2021: Investor takeaway
The growth of the cannabis industry is set to come from all kinds of angles and opportunities. As the sector continues to expand, so too will the options for investors in terms of exposure and gains. Cannabis investments aren’t reliant on just grower companies anymore.
Ashley Chiu, cannabis strategy advisor with EY Canada, expects to see innovation in the form of clinical research, technology properties, intellectual property development and education; these elements will serve as key differentiators for players in the cannabis industry.
When it comes to the defining model of 2021, Krane told INN he wants to see a real delineation between companies operating on fundamentals and those relying on hype.
“We may see some name brands go under in 2021, but the cream will rise to the top and the likely eventual big winners in the market will start to emerge,” Krane said.
At the end of the day, however, the market will demand results, and according to Lewis, demands are adjusting within the industry.
“2021 will be the year companies pivot their focus to generating positive cash flow and exhibit a viable business model to investors. The market no longer rewards aggressive expansion, but is now looking for material profitability,” he said.
Don’t forget to follow us @INN_Cannabis for real-time news updates!
Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: 4Front Ventures is a client of the Investing News Network. This article is not paid-for content.
The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.