After a crop of disasters struck marijuana stocks in 2019, the cannabis analysts at Stifel expect a rebound in the first half of this year. Ontario store openings should uncork a Canadian bottleneck, says the broker, while U.S. operators will grow out of the shadow of their stumbling northern counterparts.

Last year saw a collapse in shares of Canadian pioneers like Canopy Growth (ticker: CGC) and Aurora Cannabis (ACB), but Stifel and its newly acquired Canadian affiliate GMP see upside for smaller outfits like Fire & Flower Holdings (FAF. Canada). The stocks of American pot sellers were caught in the downdraft, but their steady growth let them raise capital in debt markets even as equity funding shriveled.

Stifel’s favorite U.S. operators are Green Thumb Industries (GTII. Canada) and Curaleaf Holdings (CURA. Canada).

Canada mishandled the retail end of pot legalization, especially in its most populous province of Ontario. By the end of 2019, the western province of Alberta had 300 stores, while the threefold more populous Ontario had fewer than 25. That meant that Toronto consumers continued to patronize their black-market dealers and producers like Canopy had to take back unsold inventory from the provincial wholesaler.

Ontario will expand its retail licensing this year. Starting in April, the province will add 20 outlets a month. By year-end, there should be 250, say Stifel GMP analysts Justin Keywood and Rob Fagan. They believe there is room for a lot more. The province has 1,300 beer and liquor retailers. Colorado has around one-third of Ontario’s population, but more than 500 cannabis dispensaries.

Stifel says the opening of Ontario’s retail distribution could provide the biggest upside for little Fire & Flower. It had 2019 revenue of about 50 million Canadian dollars (US$38 million), Stifel estimates, with a per-share loss of C$0.29. Its stock trades for pennies—C$0.84, recently—for a market capitalization of just C$100 million.

The analysts see Fire & Flower’s store count expanding from 30 at the end of September 2019, to more than 100 by 2021, allowing the pot seller to become profitable. That would lift its stock above two dollars, says Stifel.

The fact that pot is illegal under federal law forced U.S. operators to go to Canada for stock listings. Their shares were dragged down some 40%, on average, in the sector’s selloff last year.

Retail sales grew strongly, nevertheless, with the market doubling in many states. Stifel expects growth to continue in 2020 at a rate of at least 25%, powered by new recreational markets such as Illinois.

Well-funded operators are likely to thrive in that robust American cannabis environment, Stifel believes. It has Buy recommendations on a bunch of names— Trulieve Cannabis (TRUL. Canada), Cresco Labs (CL. Canada), TerrAscend (TER. Canada), iAnthus Capital Holdings (IAN. Canada) and Harvest Health and Recreation (HARV. Canada)—but its favorites are Green Thumb and Curaleaf.

Green Thumb shares could nearly triple from their recent price of C$12, to reach C$32, while Curaleaf could rise similarly, from C$7.83 to C$24, Stifel says. Green Thumb has generated more than double the cash flow of its next closest rival and stands to benefit from the recreational market in Illinois.

Curaleaf has the deepest pockets among American operators, so it can continue to make acquisitions, as it did in 2019. “We view the company’s fortified balance sheet as a clear competitive advantage to fuel future value creation,” Stifel’s Rob Fagan says.

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