Haywood Capital Markets delivered a report on the US cannabis sector on Tuesday, including a preview of third quarter earnings. And while the picture is a little gloomier than previously forecasted, there’s a lot to be optimistic about, as a number of states will be putting adult-use legalization on the ballot in the November mid-terms.
“Rough all over,” is the likely assessment many observers would have about cannabis stocks so far in 2022, including Haywood analyst Neal Gilmer, who pointed to the 61 per cent drop across publicly-traded multi-state operators (MSOs) this year as prime evidence. Gilmer said a lack of capital available to invest in the space has been a factor, as has been the overall investing environment, where the S&P 500 is down 23 per cent for the year.
“While the fundamentals in the sector remain encouraging, growth rate expectations have certainly moderated with strong inflation and higher interest rates putting pressure on the consumer. The outlook for the sector as a whole remains positive with more new state programs expected to launch over the next couple of ears, but the key for the sector remains some sort of federal reform,” Gilmer wrote.
As far as the third quarter goes, Gilmer said results should show muted sequential growth, noting that sales growth has been relatively flat over many markets along with price compression in a number of states. Gilmer said New Jersey proved to be the lone bright spot in the Q3 with adult-use sales having started in April of this year; as such, the analyst is expecting to see outperformance from those operators with exposure to New Jersey in comparison to the rest.
Nevertheless, Gilmer said he has lowered his revenue and EBITDA estimates for all the US cannabis stocks in Haywood’s coverage universe along with tempering growth expectations for both the Q4 and 2023 periods. Gilmer cautioned that year-over-year growth for the US cannabis names still remains strong and advised investors to not be too focused on the quarterly ups and downs, which may have been more illuminating during the earlier days of the market’s evolution.
“We highlight that on average the annual year-over-year growth remains encouraging and supportive of our fundamental outlook,” Gilmer wrote. “We expect companies across the board to provide a very cautious outlook given the uncertainty of the consumer behaviour and the general expectations that we enter a recession in the US.”
State-level, the last election in November, 2020, was a positive, as voters from Arizona, New Jersey, South Dakota and Montana all voted in favour of adult-use cannabis legalization. The industry hopes to repeat the sweep this year, with Arkansas, Missouri, Maryland and North and South Dakota all putting rec cannabis on the ballot.
As for share prices, Gilmer is less positive, saying stocks are likely to keep struggling to gain momentum and that this state of affairs is likely to persist until there’s clear evidence of federal reform on the horizon.
Gilmer’s comments come after a dramatic couple of weeks for pot stocks, which rose sharply on news from the Whitehouse that President Joe Biden would be giving federal-level pardons to citizens convicted of simple marijuana possession and that he would ask authorities to review cannabis’ status as a Schedule 1 narcotic. That drove up stocks across the industry with many names putting on well over 30 per cent in one day of trading. It didn’t last, however, as much of those gains were lost in subsequent trading sessions.
The problem, according to Gilmer, is that even if marijuana gets reviewed, the likely outcome is moving it to a Schedule 2 drug, which would support medical uses and research but not help with the tax code changes that the industry sorely needs. Instead, Gilmer says a lot will depend on whether the SAFE Banking Act can make it past the Senate in the Congress session coming up after the mid-terms.
“We continue to believe that SAFE+Banking has a reasonable chance to pass following the mid-terms and that would provide a significant boost to valuations. However, it is clear that investors are taking a wait-and-see approach, given the unreliability of politicians generally,” Gilmer wrote.
On the stocks themselves, Gilmer provided updated financial forecasts, ratings and targets for the following companies. All target prices are expressed in Canadian dollars and all projected returns are as of the date of Haywood’s report.
Stock: Ascend Wellness (Ascend Wellness Stock Quote, Charts, News, Analysts, Financials CSE:AAWH.U)
Target Price: $5.00 (previously $8.50)
Projected 12-month return: 184 per cent
Stock: Cresco Labs (Cresco Labs Stock Quote, Charts, News, Analysts, Financials CSE:CL)
Target Price: $7.50 (previously $9.00)
Projected 12-month return: 73 per cent
Stock: Curaleaf Holdings (Curaleaf Stock Quote, Charts, News, Analysts, Financials CSE:CURA)
Target Price: $10.25 (previously $12.00)
Projected 12-month return: 41 per cent
Stock: Green Thumb Industries (Green Thumb Industries Stock Quote, Charts, News, Analysts, Financials CSE:GTII)
Target Price: $23.00 (previously $26.00)
Projected 12-month return: 67 per cent
Stock: Trulieve Cannabis (Trulieve Cannabis Stock Quote, Charts, News, Analysts, Financials CSE:TRUL)
Target Price: $40.00 (previously $38.00)
Projected 12-month return: 174 per cent
Stock: Verano (Verano Stock Quote, Charts, News, Analysts, Financials CSE:VRNO)
Target Price: $16.50 (previously $20.00)
Projected 12-month return: 152 per cent
Stock: Vext Science (Vext Science Stock Quote, Charts, News, Analysts, Financials CSE:VEXT)
Target Price: $0.70 (previously $1.00)
Projected 12-month return: 150 per cent
Stock: 4Front Ventures (4Front Ventures Stock Quote, Charts, News, Analysts, Financials CSE:FFNT)
Target Price: $0.80 (previously $1.00)
Projected 12-month return: 48 per cent