Canaccord Genuity analyst Bobby Burleson believes cannabis stocks will outperform in 2020 and many investors probably feel that things couldn't get much worse. The group performed terribly during 2019 because of macro conditions in both Canada and the U.S. Canada experienced a slowness in demand growth as supplies increased. In the U.S., the vape crisis and slow state rollouts conspired to take down stock valuations of domestic companies.
Burleson outlined several reasons why he expects the sector to rebound in the new year. While most cannabis bulls have focused on Canada 2.0 as a reason for the group to turn around in 2020, Burleson mostly points to the U.S. market for the reasons why the stock valuations will improve. He believes that there will be a second wave in U.S. capital markets. That may happen because some investors are trying to back out of expensive deals they agreed to over the past year.
Viridian Capital said it was seeing more M&A deals unwind. The company wrote, "Deals that were formed within the last year are now considered to be unacceptable from a valuation and dilution perspective for the announced buyers." Still Burleson thinks that better state trends will cause a rotation into U.S. names.
U.S. Turns A Corner
The California market has faced issues over high taxation and a slow rollout of licenses in different municipalities. While there has been an attempt to thwart the illicit market, it continues to draw a large amount of sales away from licensed operators. Burleson trimmed his 2019 sales estimate from $3.2 billion to $3 billion. Still the analyst thinks the state will make a stronger effort to enforce the laws against the illicit market that will drive sales to the legal channels.
In Massachusetts, the recreational rollout was slow but sales were strong enough to cause Burleson to lift his sales estimate for the state from $703 million to $737 million. He said he expects 2020 sales to hit $900 million even as operators struggle with licensing challenges. "In total, there are 53 operators with licenses for recreational cannabis while there are more than 3x that number of pending applications," he wrote. "With that said, the licensing headwinds present a significant opportunity for operators in the state with existing and sizable operations including AYR Strategies (AYR) , CLS Holdings (CLSH) and TILT Holdings (TILT) ."
Illinois recreational sales begin on January 1 with a quick rollout at medical dispensaries. He is forecasting sales of $488 million in 2020. Michigan also started its recreational marijuana sales and they are forecast to hit $1.2 billion in 2020.
Between the SAFE Act on banking and the States Rights Act, it seems like 2020 will bring some advancement on positive legislative moves at the Federal level. At the state level, initiatives are likely to pass in Arizona and New York. Other states like Connecticut, New Mexico and Rhode Island could legalize cannabis the way Illinois did in 2020. New Jersey and Pennsylvania are also contenders for efforts at legalization in 2020.
Vape Crisis On The Decline
Vape-related hospital visits peaked in September and have been declining ever since. The general acceptance that the illnesses were caused by counterfeit vape products has led consumers to be more careful about the vapes they use. Companies have begun using anti-counterfeiting technology and consumers have returned to buying their favorite, trusted vape products. Burleson thinks vape-related companies could rebound from the drastic selloffs they have endured. These would include KushCo (KSHB) , Greenlane (GNLN) , Slang Worldwide (SLNG) and TILT Holdings.
FDA & CBD
The FDA has certainly been cautious with regards to the its stance on regulations about cannabidiol. Guidance is expected to come in 2020 and that could give clarity for many companies that have been equally cautious on promoting their products. The analyst is forecasting U.S. CBD sales to grow from $1.9 billion in 2018 to $18 billion in 2024.
Overall, Burleson said, "We believe U.S. names can continue to gain ground on a relative basis in 2020, given a broadly solid demand backdrop, and the potential for M&A activity to catalyze share prices and allow a resurgence in capital markets activity."