It has been a brutal six months for the cannabis sector, and stock markets have responded accordingly.

In Canada, the black market remains the go-to source one year after recreational legalization. Licenced producers appear increasingly desperate to win over investors wary of lacklustre financial results, the potential health risks of vaping, sparse retail stores, the scandal at CannTrust Holdings Inc. (TRST.TO)(CTST), and lingering questions about major players.

All this has sent shares tumbling to near 52-week lows. But investors may be blinded by bad news.

“It’s easy for market participants to overthink the space,” Purpose Investments’ Greg Taylor and Nawan Butt wrote in a research note. “It’s simple: take a product which is consumed by millions via black market and convert the consumer to the legal channel.”

Taylor, who manages the $39 million Purpose Marijuana Opportunities Fund, is well aware of the headwinds puffing against the pot sector. But he sees “plenty of potential sparks” that could reverse six straight months of declines, and he’s been using cash reserves in his fund to buy the recent dips.

A big spark on his radar is south of the border. The U.S. House of Representatives approved the Secure And Fair Enforcement (SAFE) Banking Act in late September, legislation that would allow banks to legally provide financial services to legitimate cannabis businesses. There is also increasing support for the Strengthening the Tenth Amendment Through Entrusting States (STATES) Act, which would also pave the way for improved access to American financial institutions.

“There are billions of dollars of revenues and earnings which will be turned to public market investors in coming years,” Taylor and Butt wrote. “Now is the time to get in, before the STATES or the SAFE Act lets the large institutional investors waiting on the sidelines consume the U.S. market.”

Taylor has been putting his money where his mouth is, shifting his fund towards greater U.S. exposure in recent months. Top holdings include Massachusetts-based Curaleaf Holdings Inc. (CURA.CN)(CURLF), Harvest Health & Recreation Inc. (HARV.CN)(HRVSF) from Arizona, and Green Thumb Industries Inc. (GTII.CN)(GTBIF) from Illinois.

Taylor and Butt are also encouraged by developments in Canada, including the debate around the Ontario government’s role as a wholesaler in that province, and new products including beverages and edibles expected to be released in mid-December.

“Rumours of apparently delicious chocolates and beverages promise to reinvigorate the Canadian cannabis consumer,” the pair wrote. “Consumables have shown to control upwards of 30 to 40 per cent market share in mature markets such as Colorado and California. Improving margins and new incremental clientele should help participants catch up to expectations.”

The upbeat tone follows a decidedly more pessimistic view from Cowen analyst Vivien Azer, who cut price targets on a big swath of U.S. and Canadian companies last week in a note titled “Vexed on vape? Hello volatility.”

“We see near-term pressures to performance, in addition to existing structural issues,” she wrote in the research note. “We are taking a more cautious view to our estimates and valuation as headwinds provide more questions than clarity.”

Azer cut her stock price targets on U.S. producer Acreage Holdings Inc. (ACRG-U.CN)(ACRGF) to $6.50 from $9.00, Cresco Labs (CL.CN)(CRLBF) to $13 from $14, Curaleaf to $9.50 from $10.50, Green Thumb Industries (GTII.CN)(GTBIF) to $17.50 from $18.50, KushCo Holdings (KSHB) to $4 from $7.50, and retailer MedMen Enterprises (MMEN.CN)(MMNFF) to $0.85 from $1.50.





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