A Canadian investment banking and equity research firm has kicked off coverage for two US-centric cannabis stocks and offered investors a detailed look into the overall market.
In a research note issued on Wednesday (August 22), Eight Capital began coverage of both Green Thumb Industries (CSE:GTII) and MedMen Enterprises (CSE:MMEN), two cannabis companies raising capital in Canada while operating in the US.
Eight Capital slapped Green Thumb and MedMen with price targets of C$17 and C$7, respectively, on the public market. Both companies were awarded “buy” ratings from the firm.
“We favor vertically integrated players operating in multiple states that will create scale coupled with a first mover advantage,” the report says. Eight Capital projects the entire worth of a mature US cannabis market to be around US$63 billion.
The firm favors the states of Florida and New York as “major market opportunities” available to companies and investors. Momentum for a vote on the legalization of adult-use cannabis in Florida has picked up for a potential spot on the 2020 ballot.
Cannabis is legal for medical use in New York only for patients with specific conditions. However, a change in police practise when dealing with the drug in the state hints at an overall upcoming potential change in its legal status.
Cannabis legalization could be a political issue in upcoming election
In the US cannabis remains an illegal drug at the federal level, despite several states legalizing its medical and even recreational use. Catalysts in this market are political in nature, according to Eight Capital.
“Major political action with respect to the reconciliation of state and federal law has the potential to significantly de-risk the sector and present a more favourable business and investment climate in a massive growth market, in our view,” the firm states.
Eight Capital predicts that cannabis could quickly become a hot and decisive issue in the upcoming 2020 federal election in the US.
Despite the attention Canadian legalization has been gaining as the October 17 legalization date gets closer, the firm argues that the US market could dwarf the Canadian one as it becomes legal.
The report says that as cannabis momentum keeps carrying between states, it will only be a matter of time before the federal system feels the pressure and moves forward with legislation.
US Senator Chuck Schumer (D-NY) said his legislation was simply the right thing to do, and is hopeful his Marijuana Freedom and Opportunity Act will gain bipartisan support and clear the Senate.
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Political move towards federal legalization pushes investors to enter the market
In an email newsletter to subscribers, 420 Investor cannabis analyst Alan Brochstein wrote that the “changing of the political winds out of Washington” has allowed a shift in how companies and investors “are thinking about risk” in the previously untouched market.
Companies operating in the US have been able to become players in the public markets thanks to the Canadian Securities Exchange (CSE), whose regulations are less stringent compared those put in place by TMX Group (TSX:X). TMX Group still prevents companies from holding cannabis assets in the US.
In June at the Vancouver edition of the International Cannabis Business Conference, Anna Serin, director of listings development for the CSE, said the exchange had 71 cannabis issuers at the time, representing a C$5.5-billion market cap.
Serin added that over the past year, CSE-listed companies have raised nearly C$2 billion with 58 percent of it in the cannabis sector.
Eight Capital values “vertically integrated players with a broad network of operations throughout multiple states,” due to the limited window for these operators in gaining size, scale and market leadership.
The research note states that these operators will be “long-term winners and consolidators” in a “highly fragmented, regulated and competitive environment.” If cannabis becomes federally legal, the highlighted multi-state operators will be in an “ideal position,” according to the report, to consolidate and reach “real economies of scale.”
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Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.