US cannabis stocks are undervalued but their future depends on legalization

Analysts see a “generational wealth opportunity” in cannabis stock — expecting a future of green returns — but all investors see is red.

Last week, a bill to allow banks to do business with US cannabis companies made progress in the White House — giving hope to underperforming cannabis stocks.

Where US investors get their fix

Recreational use of cannabis is legalized in 18 states but cannabis is still illegal on a federal level:

• US cannabis companies are forced to list on smaller Canadian stock exchanges.
• US institutional investors and a large portion of US retail investors can’t invest in US cannabis stocks.

Despite the lack of US investors, US cannabis companies are rapidly growing and state level regulations continue to make progress as New Jersey, a big state for cannabis sales, comes online in the next few months.

Last year, Biden’s presidential appointment gave the industry hope for full legalization, but there has been little progress since — sending the industry on a free fall for months.

The FANG stocks of cannabis

According to Todd Harrison, these are the “FANG” stocks of cannabis dominating the industry — Curaleaf, Green Thumb, Trulieve and Cresco Labs. All four companies:

• Reported an average 112% sales growth in the recent quarter with high profitability levels.
• Only trade on Canadian stock exchanges or US over-the-counter exchanges due to US regulations.

Compared to Canadian cannabis companies (i.e. Tilray and Canopy), which are allowed to trade on major US exchanges, these major US cannabis companies are much more profitable while trading at a discount.

Looking at their valuations, US cannabis stocks are so cheap and growing so fast that it’s hard to believe they’re priced at their current levels.

Investors: Don’t take your eyes off

The sector is heavily oversold and shorted, with terrible sentiment and legalization is still likely years away  — progress is likely to be made in small steps.

But when legalization does come, it could unleash investor demand, lower costs and increase sales — which could ignite the industry.

The ETF way: These four cannabis stocks are the largest holdings in the AdvisorShares Pure US Cannabis ETF (NYSE:MSOS) — one of the only US ETFs giving investors exposure to these US cannabis companies.