Things are heating up in the cannabis space.
The group's earnings season has shown promising signs for some of the largest Canadian and U.S. cultivators, with many quickly growing and looking ahead to increasingly favorable legislative backdrops.
Here are four things investors should be watching in this hot market, according to Tim Seymour, founder and chief investment officer of Seymour Asset Management and portfolio manager of the Amplify Seymour Cannabis ETF (CNBS).
One key metric to track during earnings season is which companies are able to tap into their profitability, Seymour told CNBC's "ETF Edge" on Thursday.
"In Canada last week, what we heard from Tilray is not only is this company ... the most profitable company in cannabis, [but] it continues to get more profitable," said Seymour, also a regular CNBC contributor.
Not only has the company's merger with Aphria shown "enormous synergies in terms of cost reduction," but CEO Irwin Simon's commentary on the post-earnings conference call about growing globally and prolonging Tilray's acquisitive streak were all the more promising, Seymour said.
"I think a lot of people may be underestimating where that story can go," he said.
Canadian heavy hitter Canopy Growth is also one to watch despite taking longer to reach profitability, especially considering its main stakeholder, U.S.-based alcohol giant Constellation Brands, Seymour said.
"Investors should take a lot of comfort in the fact that Constellation Brands is a distribution and branding powerhouse and that they're playing the long game here," he said.
The story for U.S. cannabis companies is just as much about growth, with Curaleaf reporting a 140% year-over-year boost, he said.
"As we get into 2022, you're going to have this step-up function in terms of their revenue numbers and I think that's something you're going to see across the board," including from U.S. peers Green Thumb Industries and Trulieve, as many of them plan to boost cultivation over the next year, Seymour said.
And with the largest U.S. multi-state operators trading anywhere from eight to 16 times 2022 earnings before interest, taxes, depreciation and amortization, or EBITDA, they look cheap stacked against other high-growth consumer packaged goods groups, he said.
"When you consider the growth you're getting in cannabis, this is a pretty exciting time to look at these earnings," he said.
Mergers and acquisitions will be central to the cannabis market's development in the coming months, Seymour said.
"I expect significant M&A and consolidation in the sector not only as the largest multi-state operators and the Canadian [limited partnerships] look to get bigger and increase their strategic geographic footprints, but I also think you're going to see those strategics that have been waiting on the sidelines begin to start nibbling some more" as valuations become attractive enough for certain capital-rich players, he said.
On a technical basis, not everything is as rosy for cannabis stocks, with shares of some of the largest players losing steam into Friday's close despite in-line or better-than-expected earnings, Seymour said.
"We want to see some of these charts get back above their 200-day [moving averages]," he said.
Since Senate Majority Leader Chuck Schumer proposed a bill to decriminalize marijuana on a federal level in mid-July, many U.S. cannabis stocks have declined significantly, with GrowGeneration down 31%, TerrAscend down 22% and Curaleaf down 16%.
"As we assess allocation in CNBS, the price action is being dictated as much by technical factors as it is fundamentals," Seymour wrote in a Friday email to CNBC.
"Some of the technical factors include continued custodial headwinds for institutional investors to hold existing positions, and the lack of new capital coming into the industry as many institutions are still unable to own the sector because of its federally illegal status."
CNBS's top holdings as of Friday were Tilray, Green Thumb, software company and WeedMaps parent WM Technology, Canopy Growth and Trulieve.
"Reaffirmation of fundamentals and negative price action translates into opportunity as we are an active strategy that seeks to position the fund for the long term growth of the industry, and can be tactical in this environment," Seymour wrote.
Though the Schumer bill may have come as a disappointment to investors, there are still numerous macroeconomic drivers propelling the cannabis industry forward, Seymour said Thursday.
"Importantly, the addressable market continues to grow state by state," he said. "Each state that has a medical program seems to be advancing and moving towards [recreational use]. Those that don't have a medical program are beginning to go through that ballot process."
The U.S. cannabis market has grown to around $23 billion while the Canadian market sits at roughly $4 billion, according to Headset. Arkansas, Florida, Idaho, Mississippi, Missouri, Nebraska, North Dakota and Ohio all have cannabis-related initiatives on their 2022 ballots, according to Ballotpedia.
Decriminalization at the federal level will also eventually be a huge plus for the group, as it would allow U.S. cannabis companies to trade on major exchanges and gain access to some of the world's largest investors, Seymour said.
"If you're investing now in cannabis you're largely in ahead of some of the biggest investors in the world and I think that's part of the excitement," he said.
CNBS is up roughly 24% year to date.
Read all of Seymour's disclosures here.