US cannabis multistate operators (MSO) are a great investment opportunity. There was hope that the new Biden administration would move fast on the legalization of cannabis on a federal level. But so far in 2021, politicians haven’t made any real progress. Meanwhile, as the underlying businesses of these companies have grown incredibly fast in 2021, the AdvisorShares Pure US Cannabis ETF has lost half its value since peaking in February. But this pullback provides us with a massive opportunity.
MSOs are the only cannabis companies that can currently access capital at a reasonable price. As long as cannabis is illegal at the federal level, these companies can grow and gain market share against little competition, establish brand strength, buy out smaller competitors and gain the advantage of scale. These MSOs are going to win immediately if federal legalization comes quickly because the sector will soar on that news. On the other hand, if federal legalization takes a few years, these MSO stocks are going to be even better investments because they will have had years to establish dominant market positions and grow at incredible rates. Either way, shareholders are going to win and they’re going to win big.
Despite being some of the fastest-growing businesses in the market, MSOs are also among the cheapest.
No sector is growing anywhere near as fast, and yet few sectors are as undervalued. At 31.3 times EV/EBITDA (enterprise value to earnings before interest, taxes, depreciation and amortization), Canadian companies are valued 4 x higher than US MSOs. Canadian companies are not overvalued but US MSOs are big times undervalued. It is hard to believe that companies growing this fast are valued at single-digit multiples of EV/EBITDA. U.S. MSOs are actually growing faster than their Canadian counterparts. The average rate of sales growth projected for 2022 is 66% for U.S. MSOs versus only 42% for Canadian operators.
U.S. MSOs should actually trade at premiums to Canadian operators. There’s a long list of catalysts coming:
1. Passage of the Secure and Fair Enforcement (SAFE) Banking Act for cannabis businesses
2. Elimination of the IRS Section 280E tax code, which heavily penalizes these companies
3. Legalization at the federal level
4. Cannabis’s public listing on American stock exchanges
5. Institutional investors who are finally able to buy these stocks.
Once legalization happens, a lot of money will flow into these stocks.
Sven Franssen