The US cannabis industry could be in for a “nuclear winter” over at least the first half of 2023, according to Roth Capital Partners, which published an Industry Note on Monday, as macro and structural headwinds look likely to prevail across the sector. But Roth analyst Scott Fortune is still bullish on a number of names in the space, despite the gloomy near-term outlook, as he says valuations look compelling at current levels.
In general, it’s been a matter of tempering expectations for the US cannabis market, which while still holding the promise of movement at the federal level on legalization was met with some setbacks on that front in 2022, as legislation stalled and cannabis companies.
At the same time, Fortune said the industry is rationalizing, with a stronger focus on cash flow generation, decreased capex spend and scaling back in non-profitable jurisdictions. The result should be a year of bifurcation among US cannabis operators, Fortune said, with the ones best-positioned in growing markets coming out more capable of weathering another year of headwinds.
“We maintain a positive outlook for U.S. operators (MSOs) based on the solid state-level medical/recreational legalizations to drive growth bolstered by compelling low valuations,” Fortune wrote.
“Despite rationalized spending, there are some cash concerns with looming debt for larger MSOs, but we believe it is manageable through 2023. We believe the accelerating consolidation and shuttering of cannabis businesses will result in an industry likely to emerge more efficient and stronger to navigate subsequent economic headwinds,” he said.
“Federal legislation optionality remains in place (nothing expected in ’23), but the culling and rationalization of the industry should start to shape back into a favourable supply/demand dynamic as early as 2H23,” Fortune said.
Below are Roth Capital’s ratings and targets on: (1) US MSOs with market capitalizations above $1 billion and (2) US MSOs with market caps between $150 million and $1 billion. Note: all target prices are in Canadian dollars and all projected returns are listed as of the January 30 date of the Roth Capital report.
(1) Stock: Curaleaf Holdings (Curaleaf Holdings Stock Quote, Charts, News, Analysts, Financials CSE:CURA)
Roth Capital rating: Buy
Roth 12-month target: $8.00
Projected return: 113 per cent
Stock: Green Thumb Industries (Green Thumb Industries Stock Quote, Charts, News, Analysts, Financials CSE:GTII)
Roth Capital rating: Buy
Roth 12-month target: $25.00
Projected return: 232 per cent
Stock: Trulieve Cannabis (Trulieve Cannabis Stock Quote, Charts, News, Analysts, Financials CSE:TRUL)
Roth Capital rating: Buy
Roth 12-month target: $19.00
Projected return: 193 per cent
Stock: Verano Holdings (Verano Holdings Stock Quote, Charts, News, Analysts, Financials CSE:VRNO)
Roth Capital rating: Buy
Roth 12-month target: $15.00
Projected return: 426 per cent
Stock: Cresco Labs (Cresco Labs Stock Quote, Charts, News, Analysts, Financials CSE:CL)
Roth Capital rating: Buy
Roth 12-month target: $6.00
Projected return: 237 per cent
(2) Stock: Columbia Care (Columbia Care Stock Quote, Charts, News, Analysts, Financials CSE:CCHW)
Roth Capital rating: Buy
Roth 12-month target: $2.00
Projected return: 208 per cent
Stock: AYR Wellness (Ayr Wellness Stock Quote, Charts, News, Analysts, Financials CSE:AYR)
Roth Capital rating: Buy
Roth 12-month target: $12.00
Projected return: 830 per cent
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