- A Democratic majority in Congress, along with Joe Biden in the White House means federal legalization of cannabis could be within reach
- Legalization bolsters not just the top players in the space, but also helps bring about the next tier of operators in the U.S.
- Valuations once deemed lofty are now attractive.
Hunter S. Thompson famously coined the phrase 'Buy the ticket, take the ride.'
Investors should heed the words of the cannabis iconoclast as they consider if, and most importantly when, to invest in the nascent, but booming U.S. cannabis sector.
This past week, Senate Majority Leader Chuck Schumer talked about near-term cannabis legislation that could fast track "the ride," and was seemingly passing out the schedule for when investors should punch their tickets.
Cannabis stocks have had another big week, but may only just now be leaving the station.
Cannabis reform on the federal level, despite its complexities is long overdue. Despite federal headwinds, the industry continues to grow as the states legalize medical and adult cannabis programs with an eye on the fiscal bonanza, massive job creation, social evolution, and simply ratifying the will of the people.
For investors who already "bought their ticket", the ride has been volatile — at times queasy — but worth it if they invested in one of many high-quality integrated operators, or select ancillary plays.
These companies have shown they can be profitable despite the headwinds of punitive taxation, no access to traditional capital markets and no access to US exchange listings.
A look at the performance of the top five market cap US companies in the sector (Curaleaf, Green Thumb, Cresco Labs, Trulieve and Terrascend), shows year-to-date performance of 25% to 35%, and a rolling one-year performance range of 105% (Curaleaf) to 420% (Terrascend).
Schumer's comments last week not only suddenly changed the timeline, but also the scope of what realistic and effective legislation could look like.
What did Schumer say?
Last week, Schumer joined by Sens. Cory Booker, D-N.J., and Ron Wyden, D-Ore., issued a joint statement that unequivocally confirmed that the passage of cannabis reform legislation in this Congress is a priority of the new leadership.
This finally transitions the U.S. cannabis debate from if reform will happen, to when and how it will be implemented.
Their plan is to release a new omnibus cannabis reform bill that will address de-scheduling and/or de-criminalization of cannabis at the federal level (allowing states to regulate cannabis under their current regulatory regimes).
The legislation would also include long overdue restorative justice provisions to right the wrongs of the decades-long failed war on drugs, banking and capital markets provisions to allow US cannabis operators to bank and list in the United States (as opposed to Canada), and long overdue updates to the federal tax code.
With a Democratic majority in both chambers of Congress coupled with the Biden White House, the issue of cannabis reform has been elevated to a matter of national importance that is now being discussed routinely.
For investors looking to take the next ride, US federal legalization may bring significantly greater performance for not just the top five players, but also the next tier of operators in the US, as well as select top-tier operators in Canada who have strategically mapped out a US strategy.
The performance outlook is not just about the fundamentals of growth in the sector (targeting 25% compound annual growth rate and a total available market of $120 billion by 2030), it is also about the flow sidelined institutional capital that will come flooding in to take these stocks higher.
The battle cry of the Reddit Rebellion has been "follow the flows."
For cannabis investors the flows will be a major part of the ride, as the worlds biggest mutual funds, pension funds, and hedge funds will finally be able to invest in the industry and "touch the plant."
What is also part of the "ride" is a multiple re-rating for cannabis companies in line with other high growth sectors.
A recent report by Stifel's Andrew Partheniou presented an analysis that appropriately equates US cannabis operators to traditional consumer packaged goods companies, yet highlights in a federally legal environment, US cannabis companies with "2.5X higher 2021 EBITDA margin and a 38x faster 2021e EBITDA Y/Y growth rate, but trade at similar valuations on EV/2021s EBITDA…have a ~20x upside simply to trade at similar levels to their mature peers."
There is no way of sugarcoating it: U.S. multi-state operators will face a somewhat winding journey before their values multiply many times over. To date, federal cannabis policy reform has been a slow moving, and often excruciating, process for those in the industry.
Instead of focusing on the micro picture of day-to-day legislative battles or the timing of reform being approved by each chamber of Congress, bullish cannabis investors need to view themselves as arriving on the doorstep of the end of cannabis prohibition.
The short-term perspective sees the stalling of legislation like the SAFE Banking Act as problematic for capital; whereas the macro view understands that Biden's election and a Democratic Senate sweep indicates a better path for legalization.
With some form of legalization already in play in over 40 states (medicinal or recreational), cannabis is quickly emerging as a major consumer packaged goods investment allocation. Valuations which were once seen as lofty, now look extremely attractive as both profitability growth and legislation are tailwinds for a sector that's only just begun to ride.
Do you have your ticket yet?
Tim Seymour manages the Amplify Seymour cannabis ETF, ticker $CNBS and is a senior member of the investment team at JWAM, a cannabis-focused hedge fund.
Brady Cobb is the CEO of Bluma Wellness, a cannabis MSO based out of South Florida recently acquired by Cresco Labs, and has been actively involved in cannabis policy initiatives and governmental relations for the industry.