Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn


Weed flies high

Kristoffer Inton  |  09 Feb 2021Text size  Decrease  Increase  |  
Email to Friend

On the first of this month, Senate Majority Leader Chuck Schumer and fellow Democratic Senators Cory Booker and Ron Wyden announced their intentions to push major federal cannabis legislation. They plan to release a discussion draft in the early part of this year.

Investing Compass
Listen to Morningstar Australia's Investing Compass podcast
Take a deep dive into investing concepts, with practical explanations to help you invest confidently.
Investing Compass

We still think legalisation is likely going to take a couple of years, as we forecast a change to federal law by 2023. Nevertheless, legalisation sooner than that would unlock growth and capital access sooner but doesn’t change our estimated market potential of US$ 85 billion by 2030 compared with an estimated US$15 billion in 2020, according to the Marijuana Business Daily.

In the statement, the senators said they intended to gather input from all stakeholders and include social equity measures for the benefit groups. In addition, as we’ve noted before, even with the Democrats controlling the Senate legislation agenda, any form of federal law will require 60 votes and thus, Republican support. Additionally, the statement included the phrase “ending federal marijuana prohibition” rather than “national legalisation." As such, we continue to believe that the most likely outcome is the removal of federal prohibition and the recognition of a state’s right to set its own cannabis laws within its borders.

Curaleaf (CURLF) and Green Thumb (GTBIF) rose by mid-single-digit percentages, while most Canadian names rose by double digits. As our views and forecasts remain unchanged, our fair value estimates and no-moat ratings are intact. Given the massive rally across the industry since President Joe Biden’s election in November, most stocks trade in 3- and 2-star territory. Only Aurora Cannabis remains in 4-star territory, but we reiterate its extreme uncertainty rating underpinned by its reliance on dilutive equity issuances for funding its losses in its early growth stage.

Only US multistate operators Curaleaf and Greenthumb and Canadian producer Canopy (WEED) (through its standing acquisition of US MSO Acreage) have economic exposure to US legalisation through both their operations and improved access to traditional capital like banks and national stock exchanges. All other Canadian producers we cover would have to build or buy US THC operations, which might prove costly in the flood of investment we expect for the industry upon the removal of federal prohibition.

Nevertheless, all cannabis companies we cover are likely to see a flood of investment. We note that even though the Canadian operators already trade on the New York Stock Exchange and Nasdaq, institutional ownership remains notably low for the entire industry. The removal of federal prohibition is likely to invite a flood of institutional and strategic capital that would drive valuations higher.

is an Equity Analyst for Morningstar

© 2022 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

Email To Friend