Three cannabis stocks that Stifel thinks will outperform

Stifel GMP analyst Andrew Partheniou says US cannabis markets are looking better than previously expected, notably in key markets in Illinois, Pennsylvania, Massachusetts and California.

That’s good news for at least three cannabis stocks with exposure to those states, says Partheniou, who on Monday delivered a report on the state of the industry and highlighted three stocks to outperform: Terrascend (Terrascend Stock Quote, Chart, News CSE:TER), Green Thumb Industries (Green Thumb Industries Stock Quote, Chart, News CSE:GTII) and Cresco Labs (Cresco Labs Stock Quote, Chart, News CSE:CL).

Partheniou raised his 2020/2021 US industry sales forecast by about $2 billion to now between $16 and $20 billion, saying that macro data shows third quarter state markets trending ahead of previous expectations on rising wholesale pricing, especially in mature markets on the West Coast. The analyst said visibility due to COVID-19 remains impaired and thus causes for a more conservative stance on 2021, but overall, the rapid rebound in Nevada sales, the dual effect of West Coast wildfires reducing supply while demand rises and generally higher than anticipated sales growth across the country were all factors in his upsized industry expectations. Partheniou said TER, GTII and CL are all poised to outperform in their upcoming Q3 earnings.

“With IL, PA, and MA state sales coming in ~27 per cent above our previous Q3/20 forecast while we estimate CA alone could have been ~14 per cent better than we expected, we believe the companies most exposed to these strong markets could outperform in this upcoming earnings season. As a result, we raise our Q3/20 forecasts for TER, GTII and CL to be markedly higher than consensus (30 per cent, 21 per cent
and 31 per cent on EBITDA, respectively) while calling out GTII with our street-high forecasts. In addition, we raise our targets (TER by 35 per cent, GTII by 4 per cent, CL by 4 per cent), as each MSO's production and retail expansions in their respective states
drive future growth and benefit profitability.

For TerrAscend, which owns The Apothecarium line of dispensaries in California, Partheniou has raised his 2020 revenue forecast from C$201.6 million to $213.7 million.

The analyst is keeping his “Buy” rating but moving his target from C$6.50 to C$8.75, which at press time represented a projected return of 11.5 per cent.

“We are raising our target on the back of higher estimates as growth in PA exceeds our expectations, with TER's significant production expansion in the state driving likely market share capture. We also raise our valuation multiple by 0.5x and now apply a 13x
multiple on our 2021e EBITDA estimate to account for TER's more attractive growth profile,” said Partheniou.

For Chicago-based Green Thumb, which has operations across a dozen markets in the US including assets in Las Vegas, Partheniou has raised his 2020 revenue forecast from $501.4 million to $523.9 million, kept his “Buy” rating and upped his target from $42.50 to $44.00, which at press time represented a projected return of 101.6 per cent. (All figures in US dollars except where noted otherwise.)

“GTII is expected to benefit from not only a robust IL and PA market where the company is ramping up production after doubling capacity, but also from its local-geared presence in a potentially sustained rebound of the NV market and its large wholesale presence in an MA market that has exceeded Q1/20 levels after a lull in Q2/20 from the COVID- related REC shutdown,” Partheniou wrote.

Cresco Labs also gets a raise, with the analyst calling for 2020 revenue of $423.9 million from the previous $416.9 million, while keeping his “Buy” rating and moving his target from C$11.50 to C$12.00, which at press time represented a projected return of 21 per
cent.

Partheniou said, “While CL beat Q2/20 EBITDA expectations by a wide margin, we note the company had yet to fully benefit from its x6 and x4 production expansions in IL and PA, respectively. With these rather large expansions and state markets having expanded already at robust rates, we believe the company may have taken share.”

According to David Moadel of InvestorPlace a Biden Harris win in the upcoming U.S. election could be a boon for cannabis stocks.

“By her own admission, California Senator and Biden running mate Kamala Harris is no advocate of “half-steppin’” when it comes to marijuana law reform,” Model wrote recently. Biden hasn’t been particularly outspoken about revising cannabis laws. But then, on that topic at least, Harris has been doing enough talking for both of them. During a virtual town hall meeting in September, Harris swept any doubts aside and made her stance on cannabis decriminalization crystal clear: “Under a Biden-Harris administration, we will decriminalize the use of marijuana and automatically expunge all marijuana-use convictions and end incarceration for drug use alone… This is no time for incrementalism. We need to deal with the system and there needs to be significant change in the design of the system.”

“Instead of focusing on an uncertain election outcome, it’s best to concentrate on what we know. And one thing that we know for certain is that cannabis companies…haven’t had a champion in the White House for a long time,” Moadel said.