INN brings investors a closer look into the latest marijuana investing trend from the perspective of analysts and observers of the industry: the rise in popularity of US multi-state operators of cannabis assets.
As investors get ready to evaluate what the public cannabis market will gravitate towards in 2019, experts offer some names most intriguing to them for the year ahead.
While Canada dominated in 2018 with legalization, 2019 is poised for multi-state operators (MSOs) in the US cannabis industry to raise capital on the promise of expansion.
Here, the Investing News Network (INN) offers a closer look into what appears poised to be the investing trend for top cannabis stocks this year: MSOs in the US marijuana market.
MSOs conduct their businesses in legal US markets and participate by operating anything from dispensary networks to brands of products to cultivation facilities. A majority of these ventures seek vertical integration as part of their operations.
According to a report from New Frontier Data, 23 states currently hold some form of policy for medical marijuana, with 10 states allowing for recreational sales as well.
The study indicates more than half of the total US population is now in a legalized cannabis industry.
Shift in focus from Canadian plays to popular US MSOs
Following the legalization of adult-use cannabis in Canada on October 17, 2018, the marijuana stock market lagged as a sell off from investors took place in the public space.
Despite the sell off, investors have found the next growth stage section of the cannabis market and have now been attracted to MSOs raising capital in Canada.
The demand for these MSOs has led multiple observers in the industry to recognize their value and expansion potential in the market.
These plays in the US market are found on the Canadian Securities Exchange (CSE), an exchange that decided to allow US operators of marijuana assets despite the federal illegality of marijuana in the country.
Richard Carleton, CEO of the CSE, told INN last November that the stock exchange was eyeing over 140 applications to list, with 60 percent of those coming from the cannabis space.
“I think that the US companies have the confidence of investors and they’re going to be able to raise more capital,” Alan Brochstein, cannabis researcher with 420 Investor, told INN.
He foresees more public listings coming from the US rather than from Canada, representing a shift in the perception of leadership in the public space during the year.
“Investors should definitely be open minded to the US trade,” Brochstein said.
Nawan Butt, portfolio manager with Purpose Investments, identified a tactic from the cannabis investment industry that has taken ahold of the investor community.
“What we’ve done is become more aggressive on the US cannabis names, just over the past five to six months, rather than focus on the Canadian licensed producers (LPs),” he said.
Brochstein cautioned that this shift doesn’t represent a gloomy outlook for Canada, but rather that the Canadian markets will face the effects of consolidation.
“I’m not saying to sell Canadians,” he warned. “I just think it’s going to be tough for a lot of the Canadian LPs and you should expect consolidation, both from within Canada and from even US companies looking to enter Canada.”
Which MSOs are getting attention from analysts?
When asked what stocks in the US market he is watching closely as 2019 unfolds, Brochstein offered a list of MSOs he’s monitoring, including:
- Acreage Holdings (CSE:ACRG,OTCQX:ACRGF)
- Harvest Enterprises (CSE:HARV,OTCQX:HTHHF)
- MJardin Group (CSE:MJAR,OTCQX:MJARF)
- MedMen Enterprises (CSE:MMEN,OTCQX:MMNFF)
- Green Thumb Industries (GTI) (CSE:GTII,OTCQX:GTBIF)
- Cresco Labs (CSE:CL,OTC Pink:CRLBF)
- Trulieve (CSE:TRUL,OTC Pink:TCNNF)
The share prices for this mix of companies vary from growth-stage ventures to established firms with revenue and valuations showing trust from the market.
As part of a survey on the Financial Post, Greg Taylor, portfolio manager with Purpose Investments and active manager of the Purpose Marijuana Opportunity Fund, said the stock he sees as having the best options for market dominance in the US is Acreage Holdings.
Butt, also with Purpose Investments, said at the moment his firm “loves” names like Harvest and Green Thumb Industries.
MSOs have gained so much attention from the market that Matt Bottomley, director of equity research and cannabis researcher with Canaccord Genuity Group (TSX:CF,OTC PINK:CCORF), awarded Curaleaf (CSE:CURA,OTC Pink:CURLF) the firm’s top stock recommendation for the new year.
Kevin Murphy, CEO of the Acreage Holdings, indicated that investing from Canadian shareholders is leading the capital market race as they have welcomed the MSO play.
Bruce Campbell, founder of Stonecastle Investment and manager of StoneCastle Cannabis Growth Fund, views Origin House (CSE:OH,OTCQX:ORHOF) as potentially one of the only stocks with revenue and says it will be “cashflow positive by early part of second half of 2019.”
How to evaluate these fractured markets?
Unlike Canadian LPs, MSOs need to build up businesses from scratch or seek acquisitions as they enter a new state. Cannabis can’t be transferred from state to state, and the regulations for each market vary in restrictions and ease of access.
Butt said his priority is to look at which states a company operates in and “how quickly they are able to grow into those states.”
When it comes evaluating MSOs, Brochstein said he’s noticed two philosophies clash for the strategy of expansion on these companies.
“You have some companies that are kind of like the Canadian LPs and they’re very aggressive, build it in any cost, get out in front first-mover advantage, these type of things … and then at the other extreme you have companies that are seeing a fiscally prudent tune.”
As these companies enter new markets or solidify positions in existing legal markets, Butt said it’s going to be very important for investors to remain aware of the status of legalization in different states.
The portfolio manager expressed interest in Illinois, Michigan, Ohio and Pennsylvania as attractive markets within the US.
Butt cautioned that investors must know what licensing looks like in the states of operation. Due to the differences in each jurisdiction, some states have opened more restrictive markets.
The eyes of investors have moved to the US, according to experts. Investors are committed to bypassing the illegal status of marijuana at a federal level in the country and focusing on confirmation of the larger market and the possibilities of rapid expansion.
Butt said while federal legalization in the US seems like a pretty safe bet, timing is crucial. Unless there is some clarity given, money from institutional investors is not going to enter the rapidly growing MSO space.
In the investing market for cannabis firms, investors have used different tools to evaluate companies, such as production capacity. As the market evolves and matures, elements like brands, international expansion and management teams are beginning to take ahold of evaluation metrics for these ventures.
In Canada, marijuana ventures have been catalogued with similar standards. However, a crucial element for comparing companies is the status of supply agreements with provinces in Canada, proving the demand for the company’s products.
For the US market, these supply agreements will take the form of licenses to cultivate product either for medical cannabis products or recreational ones.
Companies can also gain licenses for the establishment of retail dispensaries to sell medical or recreational weed products.
At the start of 2019, the public sentiment from investors in the marijuana stock market seems to be tipping towards an appreciation and dominance from these emerging US MSOs.
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Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: 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.