Jefferies LLC has initiated coverage on seven U.S. cannabis companies, five of which are expected to double their share price over the next year in what the firm describes as a potential "generational wealth opportunity."
Analyst Owen Bennett has placed a "buy" rating on Curaleaf Holdings (CURA.CN), Cresco Labs (CL.CN), Green Thumb Industries Inc. (GTII.CN), Trulieve Cannabis (TRUL.CN), TerrAscend (TER.CN), Columbia Care (CCHW.CN), and Ayr Wellness (AYR-A.CN).
"We believe this is a generational wealth opportunity, [with] potential average expected 12-month gains across our coverage to be over 100 per cent," Bennett wrote in a note to clients on Wednesday.
"While we had justified reservations when launching on Canadian cannabis over two years ago, such caution on the U.S. would be misplaced, in our view."
Bennett expects the United States will not federally legalize cannabis until 2026. The change would create a host of tailwinds for the sector, including inter-state commerce among the fragmented states where pot has become legal.
Even without major legislative reforms, Bennett predicts near-term industry growth will remain "very strong." Jefferies estimates the U.S. cannabis sector will grow at a 14 per cent rate over the next decade, lifting sales from US$17 billion in 2020 to US$64 billion by 2030.
With more states expected to legalize the drug amid growing social acceptance, Bennett also predicts greater interest from institutional investors, as well as M&A deals as the market matures.
"Given the current federal illegality of cannabis, most institutions are unable to get involved for one reason or another," Bennett wrote. "With near-term developments expected very soon (next 12 months) that will provide protection to capital market activity and allow institutions to invest, we see this as a key catalyst to a flood of new money and sector re-rating."
He notes U.S. pot stocks remain attractive from a value perspective compared to Canadian peers, many of which have shown lacklustre financial performance. Jefferies pegs enterprise value for Canadian pot producers at 109 times earnings with interest, taxes, depreciation, and amortization, compared to 19.5 times EBITDA for the U.S. counterparts.
"Despite Canadian cannabis industry growth disappointing to date, Canada itself being smaller than California, and the companies all generally struggling to make money, valuations are at a significant premium to U.S. cannabis," Bennett wrote.
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.