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Stifel: Comparing US Cannabis To Traditional CPG Suggests ~20x Upside

On Monday Stifel GMP released their 2021 US Cannabis outlook. Andrew Partheniou, Stifel GMP’s cannabis analyst, headlines the note by saying that the US Cannabis regulator arbitrage is a gift for investors.

Partheniou, in his first paragraph, writes that they are impressed with how well these companies have built their operations up during 2020 while being penalized due to having a high cost of capital and a much higher tax rate due to 280e and believes that the fundamental’s have not fully been reflected in the share price yet, mainly due to regulatory conflicts at the state and federal level. He adds, “we believe the price action seen is supported by existing strong fundamentals.”

The next thing Partheniou addresses is how resilient the US cannabis companies are while mentioning the vape crisis, the Department of Justice holding up the M&A process via a long drawn out HSR process, a high cost of capital, 280e/effective tax rate over 50%, and COVID creating a harder operational environment. After all these bumps, the companies have likely taken away market share from the illegal market, lowered the cost of capital from 15-20% to 12-14%, achieved positive net income or operational cash flow, and have received essential business designations.

Partheniou then comments that a Georgia Democratic sweep could accelerate the SAFE act, saying, “While we believe the SAFE Act could pass in a status quo scenario, with incoming Banking Committee chairman Sen. Toomey’s (R) voicing support, we note a Democrat-controlled Senate could remove the risk of Sen. McConnell (R) refusing a full floor vote.”

Partheniou also notes that New Jersey and Arizona are poised to begin recreational sales in 2021, and they are not currently included in Stifel GMP’s forecasts. He believes recreational sales give Arizona a 10-25% upside and New Jersey a 150-250% upside. He also expects the cannabis landscape to grow by 50% in 2021. He mentions that the current industry run-rate is about $19 billion.

In the last paragraph, Partheniou writes, “Comparing US cannabis to traditional CPG suggests ~20x upside.” He believes this disconnect is due to operators being limited to only the junior exchanges. He says that they have roughly 9x less trading liquidity and writes, “In our view, this is a regulatory arbitrage as fewer investors have access to CSE and OTC markets.”


Information for this briefing was found via Sedar and Refinitiv. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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