Is the Market Becoming at Least Relatively Rational?
The graph shows the price of an equally weighted basket of the top five market cap U.S. stocks (Curaleaf, Cresco, GTI, TerrAscend & Verano) versus their Canadian counterparts (Aurora, Canopy, Cronos, Sundial & Tilray) where each stock’s price equaled 100% on February 19th, the approximate top of the market.
Since February 19th, the prices of the top U.S. stocks have fallen 18.7% while their Canadian counterparts have fallen 38.7%.
We believe the market action reflects several realizations:
U.S. Federal legalization may not come as quickly or easily as many had hoped.
The benefits of positive legislation easing banking restrictions and possibly lessening the burden of 280e will accrue primarily to the U.S. competitors.
The US MSOs are consolidating their positions in a manner that will make it difficult for Canadian competitors to assail, even if legally allowed.
Recent earnings releases point to the structural lack of profitability of the Canadian LPs, an issue that does not seem to be going away.
The five Canadian companies in our graph now trade at an average EV/2022 consensus revenue multiple of 13.6x vs 5.99x for the U.S. companies. Investors should look to rebalance their portfolios to greater weighting of the better valued, more profitable, and faster growing U.S. competitors.