There’s a new school of thought emerging among cannabis industry experts. While many analysts have picked major Canadian marijuana firms as their top picks to invest in, there are some that believe these stocks are still quite overpriced, despite the market losing plenty of value in Q4 2018 as well as recently in May.
New research has come out which suggests that the biggest names in the industry right now, such as Canopy Growth Corp (NYSE: CGC) and Aurora Cannabis (NYSE: ACB) are overpriced, while smaller competitors are undervalued.
While the hype behind cannabis has helped the sector across the board grow and secure funding, recently the market has seen the lions share of public interest gravitate towards a few major names.
Compass Point Research & Trading analysts Rommel Dionisio and Isaac Boltanksy wrote in their first industry report that Canadian pot producers were trading at expensive multiples.
According to Barrons, the two analysts noted that over 80 percent of the world legal cannabis sales will come from the U.S. while legal sales of cannabis as a whole grow at over 20 percent annually.
However, despite the fact that the U.S. dominates in terms of overall cannabis consumption, Canadian companies like Canopy Growth and Tilray (NASDAQ: TLRY) are trading at valuation multiples at least three times higher than their U.S. rivals.
“[W]e cannot help but notice a striking level of disparity,” said the Compass Point pair, “when comparing the major Canadian companies to the largest American multistate operators.” They went to highlight Tilray by name, saying that even with its drastic decline in price over the past few months, still is relatively overvalued. “Several major competitors have begun to surpass Tilray in establishing production and manufacturing capacity,” they write, “and perhaps most important, in establishing well-known brands of cannabis products.”
The total market cap of Canada’s top five cannabis producers – Canopy, Tilray, Cronos Group (NASDAQ: CRON) and HEXO (TSE: HEXO) – totals at $36 billion.
In comparison, even including the top ten U.S. companies by size, America’s leading cannabis companies total at just half the previous figure at $17 billion.
Considering that the analysts forecast in their report that Canada will see $2.7 billion in cannabis sales in 2020 while the U.S. will see over $4.8 billion, their only conclusion is that Canadian companies have been largely overpriced.
Most of these companies are trading at over 10 times their 2020 projected sales, in comparison to U.S. firms that trade around three times.
Some companies, such as Tilray and Cronos Group, used to be some of the most overvalued stocks in the market, but have now lost a lot of their stock price.
But even mainstream companies that have become Wall Street darlings, such as Aurora, are considered to be overvalued when compared to the potential market size across the two countries as well as their fundamentals.
Compass Point Research & Trading currently has buy ratings on two companies, KushCo Holdings, as well as New Age Beverages as the company, predicts these stocks could spike by over 70 percent. In comparison, they only have a neutral rating to Canopy and Tilray.