The Next Big Cannabis Buyout Target

Inside of Cannabis Dispensary

When a stock jumps 124% in three weeks, it’s time to pay attention.

That’s what just happened to Liberty Health Sciences (CSE: LHS, OTC: LHSIF), one of the biggest players in Florida’s high-growth medical cannabis market, after the company announced it was being bought by a competitor.

Here are some more details from the press release.

TORONTO, Dec. 22, 2020 /PRNewswire/ – Liberty Health Sciences Inc. (CSE: LHS) (OTCQX: LHSIF) (“Liberty” or the “Company“) and Ayr Strategies Inc. (CSE: AYR.A) (OTCQX: AYRWF) (“Ayr“) are pleased to announce that they have entered into a definitive arrangement agreement (the “Agreement“) pursuant to which Ayr will acquire all of the issued and outstanding shares (the “Liberty Shares“) of Liberty in an all-share transaction for a total consideration of approximately $372 million (or US$290 million) on a fully-diluted basis1 (the “Transaction“).

That news sent shares of Liberty soaring, gaining 124% in the last three weeks.

Big Gap Up for Liberty Health Sciences

This deal is sending an important signal to investors.

Cannabis Sector Mergers & Acquisitions

Mergers and acquisitions (M&A) activity is heating up in the cannabis sector, and 2021 should see a big wave of cannabis mega deals. This is creating another great trading opportunity. Naturally, investors are clamoring to know which company will be the next to jump 124% in three weeks on a buyout.

I am going to reveal an early industry leader that looks like an ideal buyout target.

This company is:

  • a market leader in high-growth Arizona
  • delivering impressive sales growth
  • Undervalued compared to peers

Harvest Health and Recreation (HRVSF)

Harvest is one of the largest cannabis companies in the U.S., with a market cap of $1 billion and operations in six states. Headquartered in Tempe, Arizona, Harvest is an early leader in Arizona’s high-growth medical cannabis market. Harvest already operates 15 cannabis dispensaries in the state.

This early leadership in Arizona’s medical cannabis market is important for another reason too.

Arizona Set to Grow on Legalization

Arizona voted to legalize recreational cannabis in November of 2020 and the state is projected to grow into one of the largest cannabis markets in the U.S.

Harvest is in a position to capture that growth because companies with medical permits are usually the first ones to receive permits to sell recreational cannabis. That puts Harvest in an ideal position to benefit from recreational cannabis going legal in Arizona.

But Harvest isn’t a singular play on Arizona. The company has operations in six states in high-growth areas.

  • 8 medical cannabis dispensaries in Pennsylvania
  • 6 medical dispensaries in Florida
  • 4 dispensaries in California

Harvest has an impressive portfolio, but this isn’t the only reason why this company is an ideal buyout target.

3 Reasons Harvest is a Great Buyout Target

#1 – Harvest Is the Right Size for a Buyout

With a market cap of $1 billion, Harvest is technically one of the largest cannabis companies in the U.S. However, it is significantly smaller than the industry’s biggest players like Curaleaf (OTC: CURLF), with a $9.5 billion market cap and Green Thumb Industries (OTC: GTBIF), with a market cap of $6.2 billion.

#2 – Harvest Is the Right Valuation for a Buyout

Harvest also looks undervalued compared to its peers. This is another way of saying this company is on sale. Harvest has a price-to-sales ratio of 5. That is a sharp discount to Curaleaf and Green Thumb’s P/S ratio of 11.

#3 – Quick and Easy Access to New Markets

Buying Harvest would give a larger cannabis company immediate entry into some of the highest growth cannabis markets in the U.S. That includes Arizona, Pennsylvania, and Florida.

Harvest is Still Trading at a 70% Discount to the All-Time High

Harvest has seen a big rebound in the last six months, up about 400% from the mid-March COVID low.

However, despite that big bounce, shares are still trading 70% below the all-time high from April of 2019.

Shares look a little overbought in the short run, but if we see a buyout, shares would likely surge higher. Even without a buyout, I expect shares to do well and hit a new all-time high in 2021.

2-Year Chart Harvest Health and Recreation (HRVSF)

The Big Picture on Harvest and a Potential Buyout

Liberty Health Science is a great example of how a stock can soar on a buyout. Looking forward, we are looking for M&A activity in the cannabis sector to heat up in 2021.

Harvest looks like an ideal buyout target because the company is still smaller than the largest U.S. cannabis companies, shares are undervalued relative to its peers, and it would be a quick and easy way for a competitor to enter multiple high-growth markets. All factors considered, this should be an excellent year for Harvest with strong tailwinds supporting shares.

Michael Vodicka owns shares of Harvest Health and Recreation (HRVSF).

About the Author & Cannabis Stock Trades

Michael Vodicka is an equity analyst with more than 20 years of experience trading and investing. His research has been featured in some of the industry’s most respected publications. He has been investing and leading investors in the cannabis sector since 2013.