Wall Street’s new marijuana analyst is overweight Tilray and Canopy

Piper Jaffray initiated coverage on cannabis producers Tilray and Canopy Growth on Tuesday, joining a short — but growing — list of Wall Street brokerages watching the industry.

While admitting “we still have much to learn in the sector,” analyst Michael Lavery set overweight ratings for both Canadian marijuana companies and told clients to expect attractive growth ahead.

“We do believe the long-term growth opportunities are significant — both from transitioning illicit trade to legal sales, medical sales, and from transitioning sales in health & wellness categories to CBD-infused products,” Lavery wrote. “While timing of further changes is difficult to predict, the pace of further legalization appears to be accelerating.”

Shares of Canopy Growth rallied 3.5 percent in premarket trading following the initiation, while Tilray shares were largely unchanged.

By starting coverage, Piper Jaffray joins a small group of brokerages devoting research to the budding industry. Until now, most cannabis investors — many of which are individuals — had to rely on reports from Cowen analyst Vivien Azer, one of the first from a major firm to cover the sector. Azer issued her 2019 cannabis outlook on Tuesday and raised her projection for U.S. sales to $80 billion by 2030.

Lavery beleves there is currently a $15 billion to $50 billion total addressable market between Canada’s medical and recreational market, medical usage in the European Union and CBD-infused products in key U.S. categories. The long-term global cannabis market is likely worth between $250 billion and $500 billion, with over 25 countries already allowing cannabis use in some form, Lavery told clients.

“We expect legal recreational marijuana to source from illicit trade and could attract new users to the category, while THC-infused drinks could source share from alcoholic beverages,” Lavery continued. “Medical cannabis can replace a variety of products (e.g. pain relief, sleep aid, opioid replacement). CBD-infused products (with non-psychoactive properties) could gain share from food, beverage, and personal care categories.”

But as governments around the world realize the potential therapeutic effects — or tax revenues — from legalizing marijuana, investors and analysts have deemed the area ripe for returns.

In the U.S., medical use has been approved in 33 states and recreational use has been legalized in 10; the analyst added that it’s possible that the federal government will legalize cannabis within the next two to five years.

The recent passage of the $867 billion farm bill, which was signed into law by President Donald Trump on Dec. 20, also represents regulatory progress, the analyst said. The law includes a provision for industrial hemp legalization that Senate Majority Leader Mitch McConnell, R-Ky., had introduced. The provision removed industrial hemp from the federal government’s list of controlled substances, making it a lawful agricultural commodity.

Sixty-six percent of surveyed American residents now support legalizing marijuana, according to the latest Gallup poll.

“If no federal action happens by 2020, federal legalization could likely be a topic of the upcoming presidential election” Lavery wrote. “Given the apparent popularity with voters, both parties could conceivably co-opt the issue. Once marijuana is federally legal in the US, we expect additional inflows of capital, potentially for acquisitions of existing players.”