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Market Outlook · U.S. Cannabis Sector
Cannabis at an Inflection Point.
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Having spent over 30 years in advisory roles in financial markets prior to entering the cannabinoid industry, I lived through many hyperbolic boom/bust market cycles. Whether a commodity cycle, the dot-com internet boom/bust cycle, or a credit crisis, they all leave a mark to remind you how to behave when the next one arrives. I assure you there is always another one. Reflecting on my past career, I think the most interesting field of study would be investor psychology. If we could consistently predict broad investor behavior, we would have an edge and more than likely consistently outperform benchmarks. Maybe it's because I'm living in this early-stage cannabinoid cycle, but I feel like I see things very clearly. Maybe even more clearly than I have ever identified with a cycle before.
The cannabinoid industry is a fascinating category. The plant is so diverse and means vastly different things to many different people. Some are enthusiastic about recreational use and others are focused on cannabinoids as medicine. What is consistent, however, is that everyone is genuinely passionate about how the plant and its different molecules can enhance quality of life for humans and even animals.
We are now well beyond the initial boom for this nascent industry, which was characterized by the usual overabundance of capital available to early entrants. Today the industry remains in a deep trough where public company valuations trade near cycle lows, down approximately 90%. Valuation multiples remain severely compressed and growth equity capital is essentially unavailable to a growing globally expanding industry. These conditions constrain corporate growth and industry expansion while stressing balance sheets. This is what a boom/bust cycle looks and feels like!
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~90% Drawdown in U.S. cannabis public-company valuations from cycle peak. Multiples remain severely compressed; growth-equity capital is essentially unavailable to a globally expanding industry. |
Why am I sharing my insights today? Well, it depends on what hat I'm wearing.
If I'm wearing my Investment Advisor hat, it's because I believe I can make investors asymmetric returns with a compelling risk-reward ratio.
If I'm wearing my industry hat, it's because I'm trying to impress upon investors that there is an opportunity to deploy capital in both public and private companies today at valuations that will not be available for much longer. I'm also trying to encourage the great people in this industry that are committed to serving the consumer and all stakeholders, to keep fighting hard. Hold onto your seat! The pendulum is reversing from its end point where it begins to swing far to the other side.
If I'm wearing my psychologist hat, it's because people are either not aware of the immediate rescheduling of medical cannabis (adult use remains pending) and the structural change that this event introduces, or they simply don't believe that it will happen.
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It's clear to me that there is a rare convergence of events that will initiate the next long-term value creation cycle for the industry. |
However, this bull market will be driven by surviving companies that operate in an industry rationalized down to far fewer companies, global expansion, reduced stigma, and scientific proof of the healing aspects of these incredible molecules. Valuation volatility will be propelled by performance, profitability, and accountability.
Executive Summary
The U.S. cannabis sector is approaching a critical inflection point — not cyclical, but structural.
For years, valuations have been suppressed by two artificial constraints:
| — Punitive taxation under 280E |
| — Restricted institutional ownership |
As these constraints begin to lift, the sector is positioned for a multiplicative re-rating, driven by:
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01 |
Earnings normalization 280E removal |
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02 |
Multiple expansion Institutional eligibility |
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03 |
Capital inflows Into a supply-constrained equity universe |
This is not a typical recovery. It is a structural repricing event. Here is a simple way to understand it.
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The Repricing Identity
Total equity upside = |
01 — Earnings Normalization
280E has masked true profitability.
280E has suppressed profitability. Its removal converts EBITDA into real cash flow and unlocks earnings visibility.
U.S. cannabis multi-state operators (MSOs), including Green Thumb Industries, Trulieve Cannabis, Curaleaf Holdings, and Verano Holdings, have operated under IRS Code 280E for over a decade. This has resulted in:
| — Effective tax rates of 50–70%+ |
| — Limited deductibility of operating expenses |
| — Artificially suppressed net income and free cash flow |
Reported earnings significantly understate true economic profitability.
What happens when 280E is removed?
The removal of 280E represents a step-function change:
| — EBITDA begins converting into real net income |
| — Free cash flow expands materially |
| — Balance sheets strengthen (including potential tax refunds) |
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$50M – $180M Estimated annual cash flow uplift per Tier 1 MSO from 280E removal. Immediate transition from "low earnings visibility" to consistent profitability. |
Key insight. 280E removal does not just improve margins — it makes the sector investable.
02 — Multiple Expansion
A disconnect that is not driven by fundamentals — it is driven by access constraints.
Despite strong operating fundamentals, leading MSOs trade at deeply discounted valuations of ~4× EBITDA vs peers at 8–14×. Normalization could drive multiple expansion.
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EV / EBITDA — Comparable Sectors |
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| Cannabis |
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~4× | ||
| Tobacco |
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8–12× | ||
| Alcohol |
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10–14× | ||
| Consumer Packaged Goods |
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10–16× | ||
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Cannabis trades far below historical levels and well below comparable consumer-defensive categories. |
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The first re-rating: earnings normalization
Even before multiple expansion, 280E removal alone creates meaningful upside. Illustrative impact:
| — EBITDA increases modestly (~20%) |
| — Net income inflects significantly |
| — Free cash flow expands sharply |
At current multiples: +20–40% valuation uplift from earnings normalization alone.
03 — Ownership Expansion
Cannabis equities are structurally under-owned.
Today, institutional ownership sits at roughly 10–15% — limited by federal illegality, custody restrictions, and exchange limitations. This is not a reflection of quality. It is a function of access.
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Institutional Ownership — Today vs. Normalized |
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Today ~10–15% |
→ |
Normalized ~40–45% |
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As barriers fall, capital enters in waves: hedge funds and event-driven capital, then crossover investors, then long-only funds and ETFs. |
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Key insight. Cannabis valuations are suppressed as much by ownership constraints as by earnings distortion.
04 — Capital vs. Supply Imbalance
A small market. Trillions of capital pools.
This is where small market size vs. large capital pool creates an asymmetric upside.
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Total MSO Equity Market $15–20B Limited scaled public operators |
Institutional Capital Pools Trillions Capital does not trickle in — it reallocates |
Even modest allocation shifts create disproportionate impact. When capital enters: demand increases rapidly while supply remains limited (a small set of scaled public operators).
Institutional capital inflows can outpace available equity supply — forcing a rapid repricing due to a supply-demand imbalance.
The Multiplicative Effect
Most sectors re-rate gradually. Cannabis is different.
Three forces converge simultaneously.
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Step 01 × |
Earnings expansion 280E removal → higher net income and FCF |
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Step 02 × |
Multiple expansion EV/EBITDA moves from ~4× to potentially 8–10× |
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Step 03 = |
Ownership expansion Institutional participation increases 2–3× |
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Combined Effect 2.5× – 4× potential equity upside |
Key insight. The cannabis sector is one of the only industries where earnings normalization, multiple expansion, and ownership expansion are likely to occur simultaneously.
What the Market Is Pricing Today
The market is implicitly saying: "Full normalization is unlikely or distant."
Because if it were imminent: multiples would already be higher, and institutional positioning would already be building.
The opportunity
This creates a rare setup:
| — Strong underlying businesses |
| — Artificially suppressed earnings |
| — Structurally constrained ownership |
| — Immediate and future regulatory catalysts |
Conclusion
The sector is not just undervalued — it is structurally under-owned and undersupplied relative to the capital that could enter.
When those constraints lift:
| — Earnings expand |
| — Capital flows accelerate |
| — Supply remains limited |
Earnings normalization alone drives modest upside — but multiple expansion drives the full repricing event.
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You may have noticed that this article focuses on the opportunity in vertically integrated plant touching companies like US MSOs, however the opportunity for asymmetric returns extends to the ancillary technologies category as well. These companies have suffered the same downturn as the industry. Competition has been rationalized down to far fewer companies. Regulatory progression, an expanding global market, and a healthier customer base will have an outsized effect on these companies as their services will become in greater demand to meet the demands of a higher regulated market. |
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About the Author Sean McLean Chief Executive Officer & Co-Founder, Peregrine Precision Systems Sean is the CEO of PPS, a family of ancillary technology companies serving the regulated cannabinoid manufacturing supply chain. Prior to PPS, Sean spent 30 years working in advisory roles in financial markets. His roles included Investment Advisor and certified Family Enterprise Advisor (FEA). |
Disclosure: This commentary reflects the views of the author and is provided for informational purposes only. References to specific companies and securities are illustrative of the broader thesis and do not constitute investment advice, recommendations, or solicitations to buy or sell any security. The author and his affiliates may hold positions in companies referenced. Forward-looking statements involve known and unknown risks, including the timing and outcome of regulatory developments; actual results may differ materially. Recipients should conduct their own diligence and consult their own legal, tax, and investment advisors before making any investment decision.
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Investor Commentary · May 2026
Peregrine Precision Systems Inc.
