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Legal sales of cannabis are growing at a better-than-20% annual rate, according to Compass Point Research & Trading. So which stocks should investors favor? U.S. ones like Curaleaf Holdings (ticker: CURLF) and Green Thumb Industries (GTBIF), not the better-known Canadian companies Canopy Growth (CGC) and Tilray (TLRY), say the firm’s analysts,

Nearly 80% of the world’s legal pot sales this year will be in the U.S., note Rommel Dionisio and Isaac Boltansky in their first report on the industry, released Monday. Yet Canada’s pot producers enjoy valuation multiples that are three times those of their U.S. counterparts.

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“[W]e cannot help but notice a striking level of disparity,” say the Compass Point pair, “when comparing the major Canadian companies to the largest American multistate operators.”

See our recent pot stock interview:Why Aphria Is a Better Marijuana Stock Than Cronos, According to an Analyst

The market capitalizations of Canada’s big five producers—Canopy, Tilray, Aurora Cannabis (ACB), Cronos Group (CRON), and HEXO (HEXO)—total $36 billion. Those of the top 10 U.S. outfits—including Curaleaf, Green Thumb, Cresco Labs (CRLBF), Harvest Health & Recreation (HRVSF), and Acreage Holdings (ACRGF)—add up to just $17 billion.

That makes no sense, say the analysts, given their forecast for just $2.7 billion in 2020 sales by the Canadians and $4.8 billion by the U.S. companies. The Canadian stocks trade at more than 10 times the companies’ 2020 sales, on average, while stocks of the U.S. firms go for about three times, they point out.

Although marijuana remains illegal under U.S. federal law, increasing numbers of states are loosening restrictions. The recent vote to legalize recreational pot sales in Illinois will bring the percentage of Americans living in rec-legal states to 30%, say the analysts.

Despite setbacks in similar efforts in New York and New Jersey, Compass Point argues, additional states will legalize recreational sales to adults. Such expansions could catalyze the stocks of Acreage, Cresco, Curaleaf, and Green Thumb. The brokerage firm has a Buy rating on each of them and says their stocks could rise by more than 60%.

Compass Point also has Buys on two companies with cannabis-related products. KushCo Holdings (KSHB) supplies vape hardware, chemicals, and packaging to cannabis sellers, while New Age Beverages (NBEV) plans to sell beverages infused with the nonintoxicating cannabis ingredient cannabidiol (better known as CBD). The analysts say these two stocks could increase by more than 70%.

Read our recent feature:CBD Is the New Marijuana. But Don’t Buy Into the Craze for Hemp Stocks.

Meanwhile, they only give Neutral ratings to Canopy and Tilray, arguing that their generously valued stocks are effectively dead money. Canopy will remain an industry leader, say the analysts, but its stock trades at a 125% premium to its peers. The shares appear fully valued, says Compass Point. It recommends that investors await a more attractive entry point.

Tilray is also a high-price stock, the analysts say. “[S]everal major competitors have begun to surpass Tilray in establishing production and manufacturing capacity,” they write, “and perhaps most important, in establishing well-known brands of cannabis products.”

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