Companies in the cannabis sector do not have a lot of coverage from Wall Street analysts for a variety of different reasons. Yet Gerald Pascarelli of Wedbush Securities has picked up coverage on the sector, and he joined PreMarket Prep Plus on Wednesday to give his outlook on regulatory reform along with a few growth prospects in the sector.
Cannabis Stock Trends: Pascarelli was asked whether the previous rise and fall of issues in the cannabis sector was a deterrent in starting analyst coverage.
The regulatory reform that was anticipated with the transition from the Trump to Biden administration has yet to occur, Pascarelli said, referring to the failed cannabis rally in early 2021.
“States went to overcapacity, which, coupled with the lack of demand, led to price deflation,” the analyst said, affecting the bottom line for several companies.
Cannabis Regulatory Reform: Although the sector took a hit in Tuesday’s session, as the SAFE Banking Reform Act was not added to the federal defense bill, Pascarelli said he is still confident that will occur.
Nine states are in the process of approving the recreational usage of cannabis over the next couple of years, he said.
“That will be incremental to category growth and the total addressable market.”
Pascarelli’s Picks: Last week, Wedbush initiated coverage on four cannabis companies, all with an Outperform rating.
Green Thumb Industries GTBIF is Wedbush's top pick and the analyst firm has an $18 target price.
“This is the best-run and the most efficiently run company in the sector operationally, by generating net positive income and cash flow and positive earnings per share,” Pascarelli said.
That is a very impressive statistic, as cannabis companies are unable to write off some expenses like so many other businesses are allowed to include.
Curaleaf Holdings Inc. CURLF is the largest cannabis company in the United States and operates in 22 states. Pascarelli's price target for the issue is $8.50. It is the most geographically diverse company in the sector and hopes to add six of the nine new states if reform is passed, the analyst said. Most importantly, the company is well-capitalized.
Trulieve Cannabis Corp TCNNF is a “bit of anomaly, as it is not in as many states as other MSOs, but they dominate Florida, which is an enormous market with over 17 million people that are in the 18 and over potential user category," Pascarelli said.
At this time, “they own 25% of all retail outlets and 50% of cannabis flower market will flow through their doors," he said.
Wedbush's price target on the issue is $18.
Cresco Labs Inc. CRLBF is an interesting one to Pascarelli, as it has a very large acquisition pending with Columbia Care.
If that deal goes through, the combined company will be the highest-grossing cannabis company in the U.S., the analyst said.
Whether or not the deal goes through, the company is still attractive to Pascarelli based on several cost-cutting measures it is taking. Wedbush's price target on the issue is $4.50.
The full discussion with Pascarelli can be found here:
Photo via Shutterstock.
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