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Cannabis companies in the US are expected to boom.
That's according to Jefferies analyst Owen Bennett, who initiated coverage of seven US cannabis companies, and gave all of them a buy rating in a note dated Wednesday. The companies are: Curaleaf, Green Thumb Industries, Trulieve, Cresco Labs, Columbia Care, TerrAscend, and Ayr Wellness.
Five of those stocks could double in value because of strong industry growth, further consolidation, and institutional investments. Overall, Bennett said Cresco is his top pick.
The companies are set to benefit from the advance of cannabis legalization across the US, Bennett wrote. Cannabis is currently legal for all adults in 19 states, and Jefferies expects the substance to become legal federally by 2026. Bennett projects that the US cannabis market will expand from about $17.2 billion last year to $64 billion in 2030.
A slew of states have legalized cannabis over the past year, including New York, which could balloon into a $7 billion market.
"We believe this is a generational wealth opportunity," Bennett wrote.
Cannabis is currently illegal on the federal level, so companies can't ship products over state lines, and most US cannabis firms primarily trade on Canadian stock exchanges. Federal legalization would render the current fragmented market obsolete and give an advantage to companies that have made moves to prepare for the new landscape.
Bennett said investors should focus their money on companies that are best positioned to succeed in that new landscape. The companies most likely to win in the long term are those that have big geographic reach in key US states (especially California), strong wholesale penetration, strategies to position themselves for interstate commerce, good balance sheets to pursue M&A, and are working to build up national brands.
Here's Jefferies' breakdown of each of the seven companies:
Cresco Labs is Jefferies' top pick because of its strong branding and presence in California. The analyst said the stock could reach C$36 a share, meaning investors could more than double their money from the current C$14.11 share price.
Curaleaf could see its stock hit C$32, up from C$17.49. Bennett said the company has the strongest long term vision among its peers and strategic footing in key states.
Green Thumb Industries' stock could reach C$72 a share from its current C$40.60 share price. Bennett says that the company has an "industry leading balance sheet" as well as an impressive branding strategy.
New York-based Columbia Care is underappreciated compared to its strong geographic base, said Bennett, adding that the company's stock could reach C$19, more than three times its current level.
Bennett said that Trulieve is the stock he's most cautious on due to the company's limited geographic reach and lack of national branding. He still says the company could reach C$62 a share, up from about C$46.90
Bennett gave Ayr Wellness a C$80 price target, compared to ts current price of C$36.14. He said that although the company doesn't score high on its metrics, that's likely in large part due to its young age, having only formed in mid-2019.
Lastly, TerrAscend has an attractive core, according to Bennett, but needs to expand its footprint to see long-term growth. He says the company could reach C$17 a share, up from C$13.40.
This article was corrected to show that the Jefferies note was dated Wednesday.
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