Cannabis stocks have been a retail investor favourite over the past half-decade, but that interest has come in waves and troughs and as anyone watching the markets over the past 12-16 months can tell, we’re definitely in a lull as far as the pot sector goes. That means stocks like US heavyweight Curaleaf (Curaleaf Stock Quote, Charts, News, Analysts, Financials CSE:CURA) have taken it on the chin, with the Massachusetts-based multi-state operator now trading at about a third of its value compared to early last year.
What’s behind Curaleaf’s plunge? There are a number of factors at play, says portfolio manager Brian Madden, who while not calling the stock a buy at current levels thinks Curaleaf is definitely one to watch in the cannabis space.
“I think there are a couple of things to point to. One is there’s been a derating of secular growth stocks broadly which is a function of rising interest rates and cannabis is nothing if not a secular growth segment of the market,” said Madden, chief investment officer at First Avenue Investment Counsel, who spoke on BNN Bloomberg on Wednesday.
“To be sure, there are lots of junky companies in the [cannabis] space and some of them have gone the way of the dodo bird and have filed chapter 11 or merged into stronger hands or what have you. This one is a survivor,” he said.
Curaleaf is one of the largest cannabis companies in the US, with operations in 23 states and currently employing over 5,600 people. At last count, the company owns 131 dispensaries and 26 cultivation sties and is expanding its presence not only across the US but in the European market. And with annual revenue now well over $1 billion, CURA remains one of the top contenders in the still-evolving US market.
Madden says the problems faced by the stock are less to do with Curaleaf’s business but with market sentiment on the cannabis space as a whole, especially in the United States where optimism about federal legalization has waned over the past year.
“I think they’re really doing all the right things,” said Madden. “They’re vertically integrated, they’re primarily operating in the US which obviously is ten times the size of addressable market versus companies that are focused strictly on Canada. And their management team has a lot of branding and consumer packaged goods expertise.”
“But they’re a victim of the environment,” he said. “The other thing that has held back this and all the other cannabis plays has been delays in legislative reforms surrounding cannabis in the US. There are a lot of things on the go legislatively in the United States that are taking precedent over cannabis reform and that I think has caused people to push out the timeline for these companies to be really monetizing the footprint they’re building.”
Last month, the US House of Representatives passed the MORE Act (Marijuana Opportunity Reinvestment and Expungement Act) for a second time, one which would remove cannabis from the list of Schedule One Controlled Substances and pave the way for companies to operate without the legal and financial roadblocks currently faced in a system still stuck on state-level legalization. But MORE and other marijuana reform legislation have gained little traction with Republican law-makers, meaning the act is unlikely to make it through the Senate.
The good vibes that came with a Democratic win in the White House now a year and a half ago have more or less faded — as have cannabis stocks, which have been falling pretty much without pause since February, 2021. But Madden says cannabis will be a legitimate industry in the US and companies like Curaleaf are going to do well eventually — although the timeline for that recovery remains unclear.
“I think this is a question of not if Curaleaf is going to be a very large and profitable dominant player in a large, profitable growing industry but when [but] we have to concede that it’s not as soon as people first thought. That’s why the shares haven’t performed,” Madden said.
“We don’t own it here at First Avenue as it doesn’t fit any of our three equity mandates. But having said that, I think it’s a leader in the space and it’s going to be one to watch for for years to come,” he said.
Curaleaf announced on Friday plans to open three more dispensaries in Florida to bring its retail footprint to 50 stores in the state, while last month it was one of a number of players to open its New Jersey stores to recreational adult-use sales. Along with its medical sales, Curaleaf said it started serving adult-use customers at its Bellmawr dispensary on April 21, the first day of legal rec weed in the state.
“The launch of New Jersey’s adult-use marketplace is a major step forward for the cannabis industry and it is a privilege to be among the inaugural group of licensees that will mark the beginning of the state’s adult-use market,” said Joe Bayern, CEO of Curaleaf, in a press release.