Where one of Wall Street's top marijuana analysts sees 80% upside

Zack Guzman
·Senior Writer
·3 min read

Despite more states legalizing recreational marijuana in 2021, stalled progress for reforms at the federal level has weighed heavily on some of the largest publicly traded cannabis stocks. 

The cannabis-focused AdvisorShares Pure US Cannabis ETF (MSOS), which includes some of the largest U.S. multi-state operators, has lost roughly a third of its value since hitting all-time highs in February as momentum at the state level was building. Since then, there has been a lot of talk among progressive Democrats about introducing progressive legislation that could change federal law, but nothing new to show for it.

Even so, one of Wall Street's most followed analysts still sees large upside for the sector that's composed of companies that remain unable to list shares on major U.S. exchanges due to federal cannabis laws. 

"From a top-line growth perspective, if you benchmark where the U.S. operators are trading relative to... beverages or tobacco, these companies are going to grow their top-lines at mid-teens to high 20s compounded annual growth rates, which is multiples faster than anything I cover in beverages and tobacco," Cowen Managing Director Vivien Azer said during Yahoo Finance's Business of Cannabis special on 4/20.

Of course, beyond not being able to list shares on major exchanges, cannabis companies in the U.S. are also saddled with higher than usual tax rates due to federal laws preventing certain expense deductions. Both of those hurdles could be removed, however, should Congress pass reforms as expected. The question has increasingly morphed from "if" to "when" that bill gets introduced, according to the political advocates leading the charge.

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As an example to show the financial impact of removing that additional federal lax liability, the CEO of Florida-based U.S. multi-state cannabis company Trulieve, Kim Rivers, told Yahoo Finance that her company would have seen its tax burden shrink by more than $60 million dollars in 2020, down from the $105.3 million it paid in taxes.

"We are very much looking forward to a day when those two things are no longer and we can operate like any other legal business in the United States," she said.

That's one reason Azer initiated coverage earlier this month on Trulieve (TCNNF) with a $65 price target, implying more than 80% upside from where shares closed on Tuesday. The other reasons stem from the company's sector-leading margins and market-leading footprint in Florida, the nation's fifth largest cannabis market.

"Trulieve has a 50% share, roughly, of the Florida market and the market is actually accelerating," she said, adding that weekly new medical patients in the state are growing at about double the rate they were in 2019. "So when you're Trulieve and you've got six times the amount of cultivation capacity that fuels a 50% market share you're going to derive a big piece of that accelerated growth."

That said, competition has keyed in on Trulieve's success. Earlier this year, multi-state operator, Cresco Labs, bought Florida-based competitor Bluma Wellness in a deal worth $213 million to open up access to take on Trulieve in Florida.

"We welcome competition," Rivers said. "In our home state of Florida, where we have dispensaries where we have the most competitor dispensaries nearby, within a mile or so, those dispensaries are actually some of our top-performing dispensaries in the state."

Zack Guzman is an anchor for Yahoo Finance Live as well as a senior writer covering entrepreneurship, cannabis, startups, and breaking news at Yahoo Finance. Follow him on Twitter @zGuz.

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