Text size

Few analysts follow America’s marijuana stocks. One who does, Rob Fagan of the Canadian firm GMP Securities, launched coverage Wednesday on the national chain Harvest Health & Recreation. He says Harvest’s stock could nearly double.

The Arizona-based company has built one of America’s largest operating platforms at an impressive speed, through license wins and acquisitions, Fagan says. Harvest “is not only an aggressive industry consolidator, but a strong operator as well,” he writes. “Management has one of the most bullish outlooks we’ve encountered.”

Harvest’s dual-listed stock (tickers: HARV.Canada or HRVSF.OTC) rose 3.2% Wednesday to close at $7.64 per share. Fagan figures the stock could rise to near $14.

American weed sellers are underfollowed and more modestly valued, compared with Canadian peers like Canopy Growth (CGC) and Tilray (TLRY). That’s because companies like Harvest or such rivals as Curaleaf Holdings (CURA.Canada or CURLF.OTC) are selling pot in violation of U.S. federal law, even though it is legal in the states where they operate. Most banks won’t work with them. U.S. brokers and the big stock exchanges won’t either. So Harvest has had to raise money in private placements and the Canadian stock market.

Read our recent feature: You’d Have to Be High to Buy American Marijuana Stocks

Harvest could have the most stores in the country, writes Fagan. It has already opened 13 stores across four states, and could open more than 100 in the next two years. The company has proven the best at winning state licenses—racking up more than twice the awards of the typical multistate operator. With $320 million in cash, it can do mergers, too. So Fagan is comfortable that Harvest can grow revenues to $800 million in 2020, from $47 million in 2018. The company’s management is more ebullient, Fagan notes, guiding to 2020 revenues of $900 million to $1 billion.

And Harvest has proven itself a decent operator, avoiding the horrendous losses shown at chains like MedMen Enterprises (MMEN. Canada or MMNFF. OTC). While running modest net losses, Harvest has positive cash flow. Its earnings before interest, taxes, depreciation, and amortization could surpass $250 million in 2020, Fagan says.

The stocks of Canada’s pot producers go for 50-times estimates for their 2020 cash flows. American operators like Harvest already sell more cannabis than their northern counterparts and are growing their businesses in a U.S. market that will dwarf Canada’s, yet their stocks trade at a fraction of Canadian multiples. That is an opportunity for investors, Fagan says.

The GMP analyst recently visited the Arizona operations of Harvest and some of its competitors. Fagan says Harvest’s stores offered “the best in-store merchandising and overall shopping experience.” Its marijuana production facilities generated impressive yields at low cost.

In arguing that Harvest stock can double, Fagan puts a generous 20-times multiple on his 2020 cash flow forecast, while assuming that Harvest adds another $90 million or so in annual cash flow through acquisitions. With licenses to open up to 136 stores, Harvest represents the most robust retail growth pipeline in the industry, he says.

Write to Bill Alpert at william.alpert@barrons.com