Booming sales and profits mean big U.S. cannabis growers are becoming attractive bets. Many investors still have to settle for shakier Canadian names which are easier to buy.
On Tuesday, Curaleaf kicks off the fourth-quarter reporting season for American cannabis companies that operate in multiple states. Large Canadian rivals Tilray, TLRY -4.50% Canopy Growth, CGC 0.52% Aphria and Cronos Group have already released numbers for the winter months, when they grew sales by 52% on average compared with the same period of 2019.
That is impressive, but will probably pale in comparison to what the Americans achieve. In their previous set of quarterly results, Curaleaf and U.S.-based peers Green Thumb Industries, Cresco Labs and Trulieve reported average sales growth of 180%. They have benefited as demand for cannabis skyrocketed during the pandemic in the U.S., a much bigger pot market than Canada. American names are also more likely to be profitable than peers north of the border, which overexpanded in recent years.
That makes today’s stock market valuations a conundrum. The four Canadian companies trade at a sky-high average multiple of 18 times projected sales, compared with seven times for the Americans. It is the same with profit multiples: Florida-based Trulieve is valued at 14 times projected earnings before interest, taxes, depreciation and amortization. Canada’s Tilray fetches 196 times.
The explanation mostly lies in where stocks are listed. Canadians have a major edge because they are allowed on U.S. stock exchanges such as the NYSE and benefit from a flood of investor cash. They can also be bought on popular trading apps like Robinhood. That is one reason why Canada’s growers saw more violent share-price spikes than American names when the WallStreetBets crowd turned its attention to cannabis stocks last month.
Meanwhile, the U.S. federal ban on pot means American growers must cross the border the other way to list on less liquid exchanges in Toronto. Their stocks do trade over the counter in the U.S., but only some brokerage account holders have access to them. Robinhood users can’t buy them, for example.
There are signs of pent-up investor demand for the U.S. businesses. An exchange-traded fund called AdvisorShares Pure U.S. Cannabis ETF, which offers exposure to U.S. growers that operate in numerous states, has grown its assets under management to more than $1 billion since it was launched on the NYSE just last September. It was allowed to list on a U.S. exchange because it uses return swaps rather than owning the underlying cannabis stocks.
Although the Canadian companies aren’t as strong operationally, their high valuations do confer a financial advantage. If U.S. federal laws change, they could use their expensive equity to snap up the American names. The risk for the Canadian companies is that any reforms stop short of full legalization, leaving them locked out of the attractive U.S. market for several more years.
This appears to be how things are unfolding: The SAFE Banking Act, a piece of legislation that would give American growers access to normal banking services, will probably be the first reform that Democrats attempt. If the bill lets U.S. names list on domestic exchanges, Canadian stocks could quickly lose their stock-market premium.
U.S. cannabis stocks look like a better trip long-term—if investors can get their hands on them.
Write to Carol Ryan at carol.ryan@wsj.com
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