Marijuana will be legal in the U.S. within a few years and the cannabis industry is on track to grow by nine times by 2030. Those were two big takeaways from Morningstar in its coverage on the cannabis industry.
"We size the current global medicinal cannabis market (excluding the U.S. and Canada) at $3.7 billion, while other published estimates range from $3.5 billion to $11 billion. We forecast total market potential of nearly $43 billion by 2030," wrote a team of Morningstar analysts led by Director Kristoffer Inton.
The analysts listed Canopy Growth Corporation (CGC) and Curaleaf Holdings (CURLF) as their top picks. The team also noted that the most undervalued stocks in their coverage were Canopy Growth, Aurora Cannabis Inc. (ACB) and Curaleaf.
Canopy Growth for International Exposure
Canopy Growth could benefit from its exposure to the international medical market, but the analysts warned that while Canada has positioned itself as a top exporter, countries with cheaper outdoor production and lower labor costs will eventually emerge. Canopy is also a potential play on U.S. legalization as a result of the company's deal to acquire Acreage Holdings (ACRGF) -- if federal legalization occurs.
Morningstar believes that Corona-maker Constellation Brands' (STZ) recent $4 billion investment in Canopy will benefit the companies from a growing demand for cannabis-infused products like beverages. The analysts calculated that the fair value estimate for Canopy is $54 and the stock was lately trading at $38.85.
Curaleaf as Pure Play U.S.
"Curaleaf provides pure-play exposure to the U.S. market, where we see massive growth for both its recreational and medical-end markets," wrote the analysts.
The U.S. cannabis market is expected to be the largest in the world. Sales are already strong and the product it is still illegal under federal law. Morningstar said full legalization will boost the existing market with improving access to banking, a normalization of taxes and a removal of current restrictions.
The acquisition of Cura Select is cited for strengthening its West Coast footprint and giving the company access to the adult-use market. Curaleaf has operations on both coasts and cultivation in six states. The stock's fair value estimate is $10.50 and the current trading price is $6.94.
Aurora Cannabis to Grow from Low-Cost Production
Morningstar sees Aurora Cannabis (ACB) as a producer that is mostly focused on low-cost production and so far has opted to go forward without a large mainstream partner. While Canopy has joined forces with Constellation Brands and Cronos Group (CRON) has linked arms with tobacco company Altria Group (MO) , Aurora has preferred to remain solo. The company has chosen to become the leader in large-scale, low-cost production described by analysts as "developing the most advanced and automated production in the industry."
Morningstar tempered that enthusiasm by suggesting that such efforts could be easily imitated in the long run. The analysts also noted that ultimately, other countries with better climates and cheaper labor will beat out Aurora's efforts. Still, Aurora could do well with this strategy in the short- and medium-term time frame. The fair-value estimate for Aurora is $9.50 and the stock was lately trading at $7.31
In addition to these companies, Morningstar is also covering Tilray (TLRY) , Cronos Group and Scotts Miracle-Gro (SMG) . The analysts believe that the "green rush" will continue through the next decade.
At the time of publication, Borchardt had no positions in any securities mentioned.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider several names mentioned to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.