- Cannabis stocks jumped on news of Joe Biden’s win in the US presidential election.
- Morningstar’s Dave Sekera shared with Business Insider two stocks that are still undervalued, and detailed why the industry has strong growth prospects.
- Visit Business Insider’s homepage for more stories.
The US cannabis industry is growing rapidly as more states decriminalize or legalize the substance.
Four states — Arizona, Montana, New Jersey, and South Dakota — voted to legalize recreational marijuana on election day, bringing the total to 15 states plus Washington, DC where cannabis use is allowed by law.
Further, President-elect Joe Biden and Vice President-elect Kamala Harris have said they are in favor of decriminalizing marijuana at a federal level.
Cannabis stocks soared on news of their victory earlier this month. But according to Dave Sekera, the chief US market strategist at Morningstar, the rally pulled a number of them out of undervalued territory, at least by the firm’s standards.
Looking at metrics like cash flow and debt, Morningstar uses a five-star valuation system to assess how undervalued or overvalued a stock is. A one-star stock is most overvalued, while a five-star stock is most undervalued. Three-star stocks are considered fair-value.
After the election, many cannabis stock prices moved up to more fair-value ratings, Sekera said.
“While we may not necessarily be able to pass any legislation in the next two years while we have a divided government, we do think [Biden and Harris’ win] would be an impetus in order to help that industry continue to grow over the next couple of years,” Sekera told Business Insider on Nov. 11.
“So a number of those stocks that were significantly undervalued that were four- and five-star, we have seen prices run up on those pretty significantly,” he added.
2 cannabis stocks still undervalued
But Sekera said that two stocks in particular with “significant upside potential” are still undervalued by Morningstar’s analysis.
One is Canopy Growth (CGC), an Ontario, Canada-based firm. Hovering near $24 a share, Sekera says the four-star stock is still undervalued by 21%.
The other is Curaleaf (CURLF), a Massachusetts-based company. Morningstar currently rates it as a three-star stock — in the fair-value range — but Sekera said the price gap between it’s current level and it’s target price is still large enough that it has room to run.
“Curaleaf, although it’s in 3-star territory, at $10.68 versus our fair value of $13, that shows that it’s still being undervalued, just not undervalued enough to tip it into that 4-star territory,” he said.
An industry primed for growth
Sekera said he anticipates the cannabis industry will see strong growth in the years to come.
In addition to the decreasing regulation and falling uncertainty in the business environment for companies in the US, Sekera said many of the industry’s stocks will get a boost when they become listed on US exchanges — Curaleaf, for example, trades over-the-counter.
This boost will come from institutional investors who will then be allowed to own the stock, he said.
“We expect that over time, that industry will start to have the ability to mature. And we think that when those stocks start to trade on the US exchanges as opposed to over-the-counter on the pink sheets, overall that will also allow a lot of institutional investors that haven’t been able to invest in those stocks today have the opportunity to invest in them going forward,” Sekera said.
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