Marijuana Stock sector expert Russell Stanley, Managing Director, Equity Research, Beacon Securities Limited
Russell Stanley is Managing Director, Equity Research at Beacon Securities Limited and has become an industry leading expert on the Marijuana stock sector. He has focused on the cannabis space since 2016, and his formal coverage universe is dedicated to the U.S. market.
As a controlled subtance, marijuana is in a peculiar grey area of U.S. law.
“Like most, we have followed the progress of federal reform in the U.S.
The rally that we saw in late 2020 and early 2021 certainly reflected overoptimism for the pace of federal reform in the U.S.
It then became clear that it was going to become difficult to get any legislation through the current government, specifically the Senate given the 50/50 deadlock there, as well as filibuster rules. So what we’ve seen since then has been a long decline in sentiment towards cannabis stocks in the U.S., as optimism for reform has declined with little mini rallies here and there, whenever optimism briefly improved.
More recently, the operators we’ve talked to have expressed greater optimism than in the past for the SAFE Banking Act to be passed in some form — more likely during the lame-duck session…
One of the big drivers behind the renewed optimism for the SAFE Banking Act is that its biggest obstacle to date hasn’t been Senate Republicans.
The strongest opposition has been from the key Senate Democrats that released a much bigger, broader legalization bill, the CAOA, which they formally introduced this past summer. Given that bill is not expected to go anywhere, it seems that the Senate Democrats behind that bill have realized that they need to pursue a more moderate pace of reform.
And each of the three key authors there, including the Senate majority leader, has made comments lately indicating that they’re open to passing the SAFE Banking Act if it can be augmented with social equity provisions.
There’s still negotiating to be done for sure, and the lame-duck period is not long at about seven weeks or so, and perhaps less because of the holidays. So they do have to thread the needle, as far as the calendar is concerned. But the operators we talk to haven’t been this optimistic on SAFE in quite some time.
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This legal uncertainty along with the general market downturn has not been kind to the Marijuana stock sector.
“The entire space has taken a hit. By our math on a year-to-date basis, the U.S. operators that trade on the Canadian Securities Exchange are down by an average of 50%. The underperformers relative to that 50% include Ayr Wellness (OTCMKTS:AYRWF), Ascend Wellness (OTCMKTS:AAWH) and TerrAscend (OTCMKTS:TRSSF), and each of them have specific contributing factors that we think explain the relative underperformance.
But the entire space is off about 50% and it’s very difficult to find any true outperformers.”
The marijuana stock expert does have some top picks.
“Our top pick right now is Verano Holdings.
It’s one of the largest multi-state operators — MSOs — and it’s also traditionally been one of the strongest performers on EBITDA margins and particularly on cash flow margins which we think is really important. It’s one of the most liquid stocks amongst MSOs.
And we think that as sentiment returns to the space, investors are more likely to gravitate towards more liquid stocks first, from a risk management perspective.
And we think it continues to trade at a discount to its closest peers for a number of reasons, one of them being it doesn’t have a long track record as a public company. And so it doesn’t have as large an investor base, or as wide analyst coverage, although both are increasing as those names do.
On a relative basis, it has outperformed the key benchmark, the MSOS, since early August, which is a trend that we expect to continue. So that’s our top pick.
Another pick on the other end of the size spectrum would be Vext Science (OTCMKTS:VEXTF).
This is a small company.
Its primary operations right now are in Arizona and secondarily in Ohio. Its margins are traditionally amongst the best in the industry as well, but because it’s a small company, it flies under the radar.
We think Vext is an inevitable acquisition target because Arizona is one of the few limited-license markets that does not cap the number of licenses any one company can own. And the MSOs are running out of room to acquire operations in a number of other limited-license markets, particularly in the East, and sooner or later Arizona is going to be one of the only states that they can buy more in.
And we think that makes Vext a worthy buy at this point.”
The marijuana stock sector has less of an inflation worry as more mature consumer product companies.
“Inflation’s impact depends on the state and its market maturity.
In states where the operations or the market itself is considered mature, valuations can be very, very attractive. For example, we recently initiated coverage of a company called Schwazze (OTCQX:SHWZ), and they operate in Colorado and New Mexico.
And Colorado is perhaps the closest thing to a mature cannabis that we have. So Colorado did over $2.2 billion in sales last year, but it is intensely competitive.
And combined with inflation and the impact on the consumer, we think Schwazze is very well positioned to acquire additional assets in a state like Colorado with little bidding competition.
So I’d say it does have an impact in as much as where you’re dealing with a more mature market, and you see pricing pressure on top of that, then the assets might be more attractively valued.
On the flip side, if you’re looking at a new market that is growing aggressively, or is recently legalized — so for example, New Jersey, or a New York, where the state is working to implement adult-use legalization — inflation still matters, but it plays less of a role because those are new markets where the anticipated growth should more than offset any inflationary challenges.”
To get the full detail on the marijuana stock sector and its prospect for growth, read the entire 2,151 word interview, exclusively in the Wall Street Transcript.
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