Stifel Nicolaus Canada Inc analysts have released a preview of fourth-quarter 2021 financial results for the US cannabis sector, along with their top picks in the space, saying “we believe there is an elevated risk for companies to underperform consensus' high expectations”, as 4Q presents “a challenging sequential backdrop”.
Among the cannabis sector risks highlighted, the analysts cited rising inflation and competition, which could pressure wallet share and company margins, along with further delays in federal cannabis reform.
“Until the visibility on REC (recreational cannabis) launch improves, we would prefer exposure to operators with access to attractive cost of growth capital, strong cash generation and a solid execution track record as those MSOs (multi-state operators) are best suited to continue consolidating the industry and translating accretive transactions to long-term shareholder returns,” the analysts said.
The Stifel analysts, though, believe “major industry catalysts” could overwhelm these downside risks, pointing to increasing store penetration and state-level initiatives, with New Jersey and Connecticut likely legalize recreational cannabis this year, as well as potential state-level reform in South Carolina and Ohio, all of which would provide increased cannabis access to about 16 million people.
The analysts also revealed their top stock picks in the space, calling Green Thumb Industries Inc “best-in-class” and Trulieve Cannabis Corp “the most profitable MSO”.
For Green Thumb, they like the company’s operational excellence with its organic and M&A growth, its focus on state markets with limited competition, and its cost discipline to generate the most earnings before interest, taxes, depreciation and amortization (EBITDA) as compared to its MSO peers.
As for Trulieve, their positive stance is supported by the “strongest profitability” among all public peers, a strong balance sheet that it can leverage to drive growth capital expenditures (CAPEX), as well as its move from a single-state to a multi-state operator.
Contact Sean at sean@proactiveinvestors.com