Last week, the cannabis sector rallied after Kamala Harris’ debate with Vice President Mike Pence. We believe the reason for the move higher is related to Harris stating that cannabis would be decriminalized under a Joe Biden administration.
In late 2019, Pew Research Center conducted a survey that found that two-thirds of Americans believe that cannabis should be legal. The survey also found that there has been a significant decline in the number of adults who believe that cannabis should be illegal. According to the survey, the percentage of adults who oppose the legalization of cannabis has fallen from 52% in 2010 to 32%.
Numbers do not lie, and the American people want cannabis to be legalized. The COVID pandemic put considerable pressure on the global economy and the US economy was not immune to this. States desperately need money and are looking for additional revenue streams in a post-pandemic world.
As it relates to economies (state and federal) finding new revenue streams, the legalization of sports betting was the first domino to fall. The change in regulation has been a catalyst for the US economy (and stock market) and several sports betting companies have recently gone public and are valued at more than $50 billion in aggregate (Draft Kings and Penn National Gaming).
We believe that the legalization of cannabis would prove to be an even larger taxable revenue stream than sports betting. States need more revenue and we expect cannabis to draw new voters to the polls and play an important role in the outcome of the November election.
If you are a US cannabis company, the current regulatory environment is a nightmare and has made operating a challenge for even the largest of US cannabis companies. Since cannabis is still illegal at the federal level, banks and other traditional financial institutions have largely refused to work with cannabis companies.
If cannabis is decriminalized, companies will be less at risk of being robbed as there will be substantially less cash on hand. If companies have access to safe banking, it would be a massive catalyst for the cannabis industry as it would allow companies to access the US capital market and it would lower the risk of operating a cannabis business
As of October 9th, the top 12 US multi-state operators (MSO) were valued at more than $15 billion. That is impressive for an industry that faces hurdles where companies are pretty much forced to spend millions on unnecessary US regulatory expenses such as:
- It is tough for companies to get insurance and most are unable to (if you get robbed, you cannot recover losses)
- Companies spend an exceptional amount of money to meet the regulations that are associated with product packaging which require an excessive amount of plastic to be used
- The legal costs and the amount of time that are associated with completing acquisitions are well above average
- Companies face additional taxes on the state and federal level
- If a company wants to enter a new market (or enter the industry), the costs associated with the process are well above average
- On the real estate side of the business, companies have to pay extremely high prices
If cannabis is decriminalized, we expect the market to record incremental growth on a going forward basis. We believe that US cannabis companies are in the early innings of a multi-decade growth cycle. Once cannabis is decriminalized, US companies would quickly start taking market share from Canada and believe that we are in the middle of a major transformation.
We believe that the decriminalization of cannabis will level the playing field for cannabis companies on the global level. If Biden wins and Harris follows through on this, decriminalization will allow companies to expense normal operational costs instead of being taxed on gross profit.
The US cannabis industry is at an infection point and a Biden victory could be the catalyst we need for the sector to be able to scale. We believe that it would be easy for US cannabis companies to take over international markets where Canada is leading the charge.
If you are familiar with the cannabis industry, then you are familiar with the big players in the space. If the cannabis is decriminalized, we expect to see some consolidation and many companies would benefit from this. Some of the companies that we believe to be flying under the radar and would benefit from this but are not limited to: Jushi Holdings, C21 Investments, Stem Holdings, Cresco Labs, Acreage Holdings and Innovative Industrial Properties.
Published at Tue, 13 Oct 2020 11:37:45 +0000