Cannabis stocks rallied on Monday after an analyst stated that U.S. names in the sector are significantly undervalued compared to more mature sectors and could be poised for notable earnings upside. 

Stifel GMP Analyst Andrew Partheniou said in a note to clients that profitability growth relative to current share prices for some U.S. cannabis stocks this year could be as high as 20 times when compared to how U.S. consumer staple companies trades.

That growth potential comes amid "regulatory arbitrage" that limits U.S. cannabis companies’ access to capital markets amid restrictions preventing them from listing on the Toronto Stock Exchange, New York Stock Exchange, and the Nasdaq.

"U.S cannabis companies have built their businesses while being penalized from lesser capital market access and higher taxes based on gross profits," Partheniou wrote.  

"Despite these obstacles, companies are now reporting positive net income, with some achieving free cash flow and a slew of catalysts in 2021 to accelerate positive momentum. However, the robust performance has yet to be fully captured in share prices … a gift we believe investors should capitalize on while it lasts."

Partheniou's report comes a day before the Georgia Senate runoff elections that could have major implications for the legality of cannabis in the United States. If both Democrat candidates emerge victorious after Tuesday's special elections, their party would control Congress and the White House -- which would clear a political pathway that could see cannabis legalized federally in the U.S. sometime in the next few years, analysts say. 

At the very least, new legislation aimed at allowing banks and other financial institutions to engage with the cannabis industry would likely pass given its existing bipartisan support, Partheniou said. 

He added that the U.S. cannabis market reached approximately US$16 billion in sales last year following the expansion of adult-use markets in Michigan and Illinois, while overall cannabis sales have been remarkably resilient during the COVID-19 pandemic. He expects sales to continue growing to about US$20 billion this year, although those estimates don't include recreational sales from Arizona and New Jersey, which should take place later this year. 

Cannabis stocks may also begin benefitting from growing interest among institutional investors amid more than US$150 million of investment entering the space in the past three months, according to Partheniou.