Five pot stocks just got a thumbs-up from Jefferies this week as the firm initiated coverage of nine Canadian marijuana growers.
Jefferies analyst Owen Bennett wrote in a note that he sees the legal weed industry growing to $50 billion in annual sales over the next decade, compared to just $17 billion this year. Bennett said a “realistic” bullish case could also see the industry growing to as much as $130 billion in sales by 2029 due to the industry’s disruptive nature.
“We see a base-case conservative industry size of over $50 billion by 2029 and a realistic upside size of $130 billion on wider industry disruption,” Bennett wrote. “Global winners to be those that lead in both medical and recreational and have a strong U.S. position. Fears on commoditization are overdone. Expect to see further consolidation, more [mainstream consumer-goods companies] taking positions and near-term focus shifting to performance vs. headlines/capacity expectations.”
For the biggest grower on his Buy list, Bennett sees 25% upside ahead for Aurora Cannabis (NYSE: ACB). The other cannabis stocks he rates a Buy are all smaller growers: Green Organic Dutchman (TSX: TGOD.TO, OTC: TGODF) which he says could see 53% upside, CannTrust Holdings (NYSE: CTST, TSX: TRST.TO) which could climb 25%, OrganiGram Holdings (TSXV: OGI.VN, OTC: OGRMF) which could see a gain of 18%, and Flowr (TSXV: FLWR.VN, OTC: FLWPF) which Bennett says could climb 7% in the next twelve months.
CannTrust recently listed on the NYSE, and Chief Executive Peter Aceto told MarketWatch early this week that he hopes the move will “broaden our investor base and give more investors access to the company,” he said.
Aceto also believes that the company is “well positioned” to take advantage of the global opportunity for both medical and recreational cannabis, which he says could be a market worth hundreds of billions of dollars.
“Half of that global revenue is going to be from medical, and we have proven leadership in medical,” he said. “We have doctors, PhDs, professors, which help us create technology with cannabinoids and cannabis.”
Bennett believes that Canopy Growth (NYSE: CGC) is well-positioned to dominate in the global cannabis market, but rates the stock a Hold based on its current valuation which he says captures its strong position in the market. His other Hold is Emerald Health Therapeutics (TSXV: EMH.VN), which is a small medical cannabis company that relies on partnerships for its supply.
Cronos Group (NASDAQ: CRON) has been generating a lot of headlines recently but Bennett thinks the stock is expensive, especially with its modest production capacity compared to a grower like Aurora, and rates it an Underperform. His other Underperform rating went to Hexo (TSX: HEXO.TO, OTC: HEXO) which Bennett says is floating on overoptimistic forecasts for its cash flow and is still in the honeymoon phase after its deal to collaborate with Molson Coors (NYSE: TAP).
While Bennett’s 250-page report only looked at companies that sell marijuana in countries where the drug is legal nationwide, like Canada, he did note that any pot company that wants to reach large-cap status will have to have a strong position in the U.S., which is projected to be the world’s largest cannabis market.
Hemp—a source of the non-psychoactive ingredient cannabidiol, or CBD—was recently legalized in the U.S. and could see sales above $32 billion by 2022. Bennett says that all of the companies he now covers “should still be establishing optionality for when/if U.S. regulations change.”
And the winds of change are blowing in the U.S. On Thursday, Senator Cory Booker, D-N.J., introduced a bill to legalize the drug nationwide. The bill comes as states are increasingly legalizing marijuana in some capacity and public opinion continues to shift in favor of legalization.
Bennett says that investors shouldn’t be concerned that “weed is just another agricultural commodity” that will see price drops from oversupply. Premium pot won’t be commoditized, according to Bennett, and he doesn’t believe we’ll see a cannabis supply glut until mid-2021 at the earliest.
“If you can deliver a top quality experience,” Bennett wrote. “You will be able to charge a premium.”