Seven US cannabis stocks with Buy ratings

Cannabis sales in the US are expected to be soft over the near term but there’s still tons of promise up ahead for the industry. That’s the take from PI Financial analyst Jason Zandberg whose Wednesday report on the sector looked towards third quarter earnings from US names. The analyst has a number of Buy ratings in the space, with Zandberg saying his top pick is Florida-based Trulieve Cannabis.

Pointing to recent data on mature markets in California and Washington States, Zandberg said sales look to be declining to the tune of ten to 14 per cent drops, per July’s figures. Most US states are reporting declining prices, he said; meanwhile, emerging markets in New Jersey, Illinois and Massachusetts are seeing smaller growth with the outlook being for sales to dip in the third quarter compared to the Q2.

Zandberg said the average US spot price for wholesale flower declined 2.5 per cent in September to $1,003/lb, with Michigan (-9.5 per cent) and Nevada (-5.7 per cent) showing the biggest declines. Meanwhile, the highest prices were found in Illinois ($3,601/lb) and Connecticut ($2,853/lb) with the lowest prices found in California ($751/lb) and Colorado ($813/lb).

“The sales growth in the US cannabis markets have been soft in 2022 as the consumers continue to return to their pre-pandemic consumption levels. In 2020 there was 50 per cent-75 per cent year-over-year growth and sales declined in 2021 relative to that high bar and 2022 has seen a similar decline to pre-pandemic levels. We expect negative organic growth in Q3 with modest growth from states like New Jersey that recently opened an adult-use market or Illinois which continues to build a base of cannabis consumers post the commencement of adult-use regulations,” Zandberg wrote.

At the same time, there are signs of movement at the federal level, with the recent “Biden Bump” in the sector coming from the Whitehouse’s statement last month that it would be pardoning federal posession convictions and asking regulators to look into re-scheduling cannabis. As for the SAFE Banking Act, which would provide protections for federally-regulated banks looking to deal with cannabis companies — a potential watershed event for the industry — Zandberg noted that US Senate majority leader Chuck Schumer has stated that a new version of the bill could pass a vote after the Midterms, leading to more support for US companies.

“If [the SAFE Act is] enacted into law, we would expect another avenue of capital for this capital-starved sector as well as the benefit of the sector’s customers finally able to use credit cards to make purchases rather than cash. The most favourable provisions that we would hope to see in this legislation is the ability of US cannabis stocks to up-list to senior US exchanges,” Zandberg wrote.

As for the seven pot co’s under PI’s coverage, Zandberg said he has lowered expectations on many fronts regarding the Q3 earnings season, particularly for those with Florida exposure, as there had been both a slowdown in patient registrations over the quarter and the operational hit of Hurrican Ian. Nevertheless, Zandberg is staying bullish on all seven companies, saying, “We like all the US cannabis names as we believe new cannabis banking regulations should lift the whole sector. That said, our Top Pick is Trulieve Cannabis due to its consistently superior financial metrics relative to its peers.”

Note: Projected returns listed below are as of publication date of Zandberg’s report and all figures are in US dollars except where noted otherwise.

Stock: Ayr Wellness (Ayr Wellness Stock Quote, Charts, News, Analysts, Financials CSE:AYR.A)

Rating: Buy

Price Target: C$30.00

Projected 12-month return: 447.4 per cent

PI Financial’s third quarter revenue estimate: $118 million

PI Financial’s third quarter EBITDA estimate: $22 million

Stock: Columbia Care (Columbia Care Stock Quote, Charts, News, Analysts, Financials CSE:CCHW)

Rating: Buy

Price Target: C$6.50

Projected 12-month return: 223.4 per cent

PI Financial’s third quarter revenue estimate: $132 million