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The year ahead could be very much like the one we just finished with when it comes to US cannabis stocks, says Haywood Capital Markets analyst Neal Gilmer, who sees more progress in building out the business in key states in 2022 while cautioning that the market is likely to stay skeptical on the space in general. In a cannabis sector update on Tuesday, Gilmer said the high hopes for federal reform that permeated the pot sector just 12 months ago have all but dissipated, even as companies continue to grow their top and bottom lines. That makes for a lot of stocks trading at marked discounts but with little indication on when valuations will rise again. “We remain optimistic on the US cannabis sector as we enter 2022,” Gilmer wrote. “Nothing has changed with respect to the fundamental outlook for strong revenue growth and solid EBITDA margins. Independent of any federal reform, the business prospects are compelling, with continued growth expected in existing markets as well as new medical and/or adult-use markets over the next couple of years.” 2021 started with cannabis companies both in the US and Canada riding high on their own good news, with Canadian companies seemingly rounding into shape after a couple of years of struggling with supply issues and a dearth of retail outlets. While in the US, the election of a Democratic government in late 2020 brought forth a wave of hope for legalization that would be a boon to hamstrung companies dealing with state-by-state business and the financial constraints involved in peddling a product still listed as a Schedule One narcotic at the federal level. Shares prices soared over January and February of last year before started a long descent, one which has yet to let up and resulted in an average 2021 return for US cannabis stocks of negative 30 per cent. Gilmer commented that while the lack of equity capital in the space remains an issue, it’s been encouraging how financial institutions have been willing to provide debt financing, pointing to US heavyweight Curaleaf which recently announced a $475-million financing round at eight per cent. That shows a confidence in the business prospects for the sector, which Gilmer sees reflected in the financials of US companies. “As we look at 2022, we believe we will see continued strong revenue growth across the group, albeit at a somewhat lower percentage rate than what has been reported over the past year,” Gilmer wrote. “That is just a natural development as the size of each market reaches a substantial size, but many opportunities remain. There will continue to be many markets that report strong double-digit industry growth that provides opportunities for companies in the sector.” Gilmer said the sector is due for “a significant rerate” once investor sentiment turns positive and liquidity issues are resolved. Until then, names are likely to continue to trade at a discount, but investors should keep their eyes on the long-term outlook for when sentiment and momentum in the space return and the market starts to recognize companies’ improving fundamentals. On a jurisdictional level, Gilmer pointed to a number of key states including Illinois, Massachusetts, Arizona and Florida, while also highlighting some emerging markets in states like New York, New Jersey, Virginia and Pennsylvania. “We expect full legalization to materialize across several states in the coming years,” Gilmer wrote. Gilmer pointed to the Gallup poll on US Marijuana Legalization Support which is currently at a record high of 68 per cent, with a party-based split of 83 per cent for Democrats, 71 per cent for Independents and only 50 per cent for Republicans. “While Republican support is much lower, its majority support along with some Republican-led reform initiatives ongoing, is becoming an increasingly bipartisan matter,” he said. As for cannabis companies within Haywood’s coverage universe, Gilmer said he’s revised his estimates and published 2023 forecasts, with the general comment that the current market sentiment is reflected in his revised multiples and price targets. In particular, Gilmer listed seven companies and their revised projections, detailed below. Ascend Wellness (Ascend Wellness Stock Quote, Charts, News, Analysts, Financials CSE:AWHH.U) Rating: Buy Target Price: C$12.00 (previously C$14.50) Projected one-year return (as of January 10 close): 107 per cent Cresco Labs (Cresco Labs Stock Quote, Charts, News, Analysts, Financials CSE:CL) Rating: Buy Target Price: C$17.00 (previously C$20.00) Projected one-year return (as of January 10 close): 103 per cent Curaleaf (Curaleaf Stock Quote, Charts, News, Analysts, Financials CSE:CURA) Rating: Buy Target Price: C$20.00 (previously C$22.00) Projected one-year return (as of January 10 close): 89 per cent Green Thumb Industries (Green Thumb Stock Quote, Charts, News, Analysts, Financials CSE:GTII) Rating: Buy Target Price: C$47.00 (previously C$52.00) Projected one-year return (as of January 10 close): 77 per cent Trulieve Cannabis (Trulieve Cannabis Stock Quote, Charts, News, Analysts, Financials CSE:TRUL) Rating: Buy Target Price: C$72.00 (previously C$80.00) Projected one-year return (as of January 10 close): 126 per cent Verano Holdings (Verano Stock Quote, Charts, News, Analysts, Financials CSE:VRNO) Rating: Buy Target Price: C$35.00 (previously C$36.00 Projected one-year return (as of January 10 close): 122 per cent 4Front Ventures (4Front Ventures Stock Quote, Charts, News, Analysts, Financials CSE:FFNT) Rating: Buy Target Price: C$1.75 (previously C$2.00) Projected one-year return (as of January 10 close): 46 per cent

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