Canada’s cannabis operators are reaping the benefits of their US counterparts’ momentum.
Companies on both sides of the border are seeing strong tailwinds in favour of US legislation and even better sales prospects to start off 2021.
Canaccord Genuity said its Canadian Cannabis Index finished 4.8% higher to end the month of February after sustained positive newsflow from the US regarding federal marijuana reform, while its US Cannabis Index was up 17.3% for the month.
US cannabis legislation is sharply in focus at the beginning of the year, buoyed by a joint statement from Democratic senators – including Majority Leader Chuck Schumer – pledging federal cannabis reform in 2021.
Canaccord said overall sales in the US could surpass US$20 billion this year. In Canada, national sales ended 2020 at an annualized run rate of C$3.5 billion.
“With an aligned House, Senate and White House, pro-cannabis legislation/measures have a seemingly easier political path to navigate, representing a moderate de-risking to the sector as a whole,” Canaccord analysts wrote in their monthly report.
“Although we caution investors that full federal legalization in the US (as experienced in Canada) does not appear to be on the table, we note that current pending legislation could see marijuana become decriminalized and rescheduled out of its Schedule 1 classification,” Canaccord wrote. “With a large majority of MSO’s tapping the equity markets back in January, we believe many of the leading US operators are sufficiently cashed-up to continue building out exposure in a sector that we believe has the potential to eclipse US$20 billion in sales this year.”
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Company valuations surged in January before leveling off slightly in February due to slightly underwhelming earnings reports from behemoths like Canopy Growth Corp, Tilray, Aurora and Cronos were overshadowed by large writeoffs and what Canaccord deemed “less certain paths” to profitability.
“We underline that Canadian operators still have limited-to-no exposure to current legal markets in the US; however, they continue the long-standing pattern of moving in correlation with US headlines,” analysts wrote. “We also note that comments made by several management teams during earnings calls held during February appeared to be increasingly bullish over the prospect of Canadian LPs eventually gaining exposure to US markets for THC.”
The group of analysts cautioned investors over the potential for Canadian licensed producers to secure meaningful exposure in the US, given the significant progress already made by key stakeholders south of the border on a state-by-state level.
It added that it will “keep a watchful eye” on the US federal landscape, which could see meaningful progress towards legislation within the year.
The firm also updated its “Watch List” of up-and-coming cannabis companies to include names like Aleafia Health Inc, Avicanna, Halo Labs, Radient Technologies, Red White & Bloom Brands Inc, TerrAscend Corp, Village Farms International, and WeedMD Inc (CVE:WMD) (OTCQX:WDDMF) (FRA:4WE).
None of the stocks on the list are currently rated by Canaccord.
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