Possible Biden win may spur cannabis industry growth
Companies with US exposure are better positioned to benefit from easing prohibition, writes Kristoffer Inton.
The upcoming US presidential election could lead to important regulatory changes that would grow the budding cannabis industry. Democratic presidential candidate Joe Biden and vice presidential candidate Kamala Harris have proposed decriminalising cannabis.
Although this would simply reduce incarceration for low-level possession crimes, it could signal the easing of federal prohibition. However, we continue to think that a change to US federal law, removing prohibition and allowing states to choose their own cannabis legality, won’t come until at least 2023. Nevertheless, interim changes can reduce legal risk and ease access to banks and other ancillary services for the cannabis industry.
We think the US market will prove to be the largest and will offer rapid growth. We forecast nearly 25 per cent average annual growth for the US recreational market and nearly 15 per cent for the medical market through 2030.
Presidential election aside, Arizona, Montana, and New Jersey are voting on recreational legalization, Mississippi is voting on medical, and South Dakota is voting on both. Successful votes open new legal markets but don’t significantly benefit cannabis companies, since it is federally illegal to sell cannabis across state lines. Additional state legalizations create new markets but require companies to apply for new cultivation and dispensary licenses in each state.
A Democrat election win will be best for the US-based THC cannabis companies, such as Curaleaf (CURLF) and Green Thumb Industries (GTBIF). Canopy Growth (CGC) is the only Canadian company we cover that has direct exposure through its deal to acquire US-based Acreage Holdings immediately upon change to federal law. We think Canopy paid a good price and acquired an attractive option for an accelerated entry into the US cannabis market.
Cronos (CRON), Tilray (TLRY), and Aurora Cannabis (ACB) have some exposure to the United States but only through hemp-derived CBD. We view CBD as less attractive than THC, given the massive amount of competition and low barriers to entry. Aphria (APHA) has no meaningful US exposure but is actively looking for a THC partner in the country.
The removal of US federal prohibitions is a primary catalyst in our bullish outlook for companies with exposure to the US cannabis market. Once US federal prohibition is removed, there will be significant competition for US THC cannabis companies. Not only could incumbents be richly valued in acquisitions, but they would likely enjoy far stronger liquidity, driving intense bidding for cultivation and dispensary licences at play.
Lastly, regulatory changes could permit cannabis stocks to trade on US exchanges as opposed to being limited to the over-the-counter market and Canadian exchanges. This would allow for greater access to capital markets. Currently, many institutional investors are precluded from investing in over-the-counter stocks due to the lack of sufficient liquidity. Thus, we could even see increased institutional ownership in cannabis companies, which remains notably low.