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On October 19, 2015, just before the Canadian election, a relatively unfamiliar stock traded under the ambitious symbol WEED on the Toronto Stock Exchange in Canada at a price of CDN $1.5 and at a value of around $500 million. This value was mainly based on medical cannabis sales since medical cannabis was already legal in Canada since 2001. In this campaign, Justin Trudeau, a liberal candidate that as part of his campaign was clearly a supporter of full legalization of cannabis and making the plant fully legal. Trudeau won this election and the Liberal Party came to power and as a result the value of the stock that I mentioned jumped in a span of just over two weeks over 100% – that stock was Canopy Growth Corporation (NYSE:CGC).
From the moment Trudeau was elected until the day full use, trade and distribution of cannabis was not considered a violation of the law exactly 3 years passed. On October 17, 2018 legalization was completed even though of course there were quite a few obstacles to climb such as constitutional changes and approvals required in the Canadian Congress and Senate. It was quite obvious from the moment he was elected the direction was clear and the path to legalization was built. Canopy Growth Corporation in its peak days traded at CDN $76, or if you want, a close to $25 billion market cap, when it multiplied its value by 50 from the day Prime Minister Trudeau was elected to the day cannabis became legal.
We stand now just a few weeks from the moment Democratic nominee Joe Biden was elected to the U.S. presidency and the optimism among cannabis investors is starting to resonate, but is there really a reason for that? In this article, I will try to elaborate on what’s going to happen in general and what is going to happen to the American MSOs and touch on the Canadians too.
It’s true that the comparison made here between the choice of Trudeau and the choice of Biden when it comes to cannabis should be taken with a limited guarantee. The conditions between the two countries and the markets differ between what was in Canada before legalization compared to what happens today in the US. But it’s still worth delving into and understanding how the regulatory and permissive changes made in Canada have benefited the companies and stocks there and how much people who acted correctly and calculatedly benefited when they read the map correctly and understood where the wind was blowing.
To understand where we are going it is worth taking a look at what happened in the elections and what the ramifications of it are:
1. Referendums on medicalization and legalization – a great victory for cannabis. In fact, every substantive law that went to the polls regarding cannabis has been passed and approved for full legalization in New Jersey, Arizona, Montana and South Dakota while in South Dakota both medicalization and legalization have been approved in two different referendums. In addition, in Mississippi, medicalization was approved and Oregon approved the use of psilocybin mushrooms for medical purposes.
This victory is huge in a few respects:
a. The population of these states is close to 20 million people and in some of them – when Coronavirus won’t be such a massive concern – there will also be extensive tourism which can enlarge the demand. These are all new markets, new consumers and multiple investments will be made in the field among these states.
b. The victory in New Jersey brings legalization closer to New York and Connecticut. Andrew Cuomo, the governor of New York has been talking for a long time about legalization in New York and the inclusion of Connecticut in a joint legal process of these three states. Unfortunately, this was postponed due to the coronavirus and priorities slightly changed, but liberal New York could not linger much longer with this decision. For them to see the tax money of New Yorkers spilling out to New Jersey across the river when they can bite off a piece of this cake for themselves? Legalization in New York is a matter of time and it will be a very big catalyst for the industry.
c. Montana and South Dakota – Those are maybe small states, but they are super-Republican and conservative states. Is this a hint that even conservative Republican voters are pushing their governors for federal cannabis changes?
2. Legalization at the federal level – so Biden was elected, what now? Is legalization in our pocket? The answer is absolutely not. Biden never said he supported legalization, on the contrary, he said he did not. Vice President Kamala Harris, on the other hand, is very pro-cannabis and generally liberal on the issue, she promised during the campaign to support non-discrimination and promote laws that would support the use of cannabis over the use of addictive opioids for medical purposes. Does that mean they will not try to promote legalization?
Also, there is a large lobby among Democrats who very much want to advance the field and while Biden is probably opposed to full legalization, that does not mean that things are not going to change for the better. There is no doubt that Democrats will try to promote the SAFE Act and States Act, which are laws that are likely to change the way cannabis business is done in the US from end to end, lead them to profitability and make them more successful and efficient companies. In addition, they will try to promote rescheduling or de-scheduling of the cannabis plant so that companies can start trading on major US stock exchanges rather than the OTC, as they are traded today.
I guess all these changes will be on the agenda for the Democrats and in one way or another they will also try to pass them in the Senate, only here there is another problem. It’s true Biden was elected and the House has the Democrats but the Senate will probably be under a majority of Republicans that might be reluctant to support those bills. The question is whether public pressure and a change in attitude in Republican states as well and the sweeping support for cannabis will help pass laws supporting the cannabis industry? It’s hard to know right now.
3. The momentum in American companies continues – the Coronavirus has helped cannabis companies and increased sales, new states have approved cannabis use, new investments are coming in, regulatory changes are beginning to take off and the financial statements show a massive increase in revenue from quarter to quarter.
Transition from the OTC secondary exchange to the NASDAQ\NYSE main exchanges
Today the shares of American companies are traded on the US OTC secondary exchange because cannabis is defined as a Schedule 1 material and therefore companies that deal with the substance itself cannot trade on the main stock exchanges. The main thing is the liquidity that exists between the stock exchanges. The volumes in OTC are sparse in relation to what is happening in the main stock exchange and there are several reasons for this:
1. Exposure to the public – Not only is the public less exposed to shares traded on the OTC but also in many cases the brokers that provide trading services on the stock exchange simply block the option to trade on the OTC.
2. Analysts’ coverage – There is much less interest in OTC and therefore also less analysts’ coverage and target prices, usually the stock surveyors there are niche surveyors and not large investment house surveyors and therefore their impact on stocks and public opinion and the amount of information available is much less.
3. Institutional – Since cannabis is considered an illegal drug, institutions, pension funds, investment houses, banks, and others are prohibited from investing in shares of this type and this is an important point to understand. In fact, entry into cannabis shares in the US today before cannabis is out of the dangerous drugs ordinance is an entry before the big and smart money of the institutions. There are not many opportunities in the stock market to get into stocks with such great growth before the institutions.
4. Reduced supervision of companies – There is less supervision on the companies that are traded on the OTC and they have to meet reduced conditions compared to the main stock exchanges and therefore they are sometimes considered less reliable for investment.
To illustrate how low the liquidity in OTC is compared to NYSE/Nasdaq, let’s look at the average volume of the two market leaders in terms of revenue from Canada and the US (CGC & OTCPK:CURLF) in the last three months before the elections and the volume on the Friday after the election when the rally of cannabis sector shares peaked (6.11.2020).
Image created by author using data from the daily or average volume of the stocks.
The huge difference in volume can be seen, with the average volume in CGC being on average 15 times higher than the volume in CURLF and by 35 (!) times of volume on a dramatic day of increases in the sector. CGC today is defined as a market leader, but will they retain this title when Curaleaf will be able to trade in the main listings of the stock exchange? Food for thought.
A touch about Canadian companies
Nowadays Canadian companies cannot export raw materials or products to the US or make purchases from American companies related to the cannabis field and this actually prevents them from entering the largest cannabis market in the world. Companies try to do what they can to get into the US before regulation allows. For example, Canopy signed a future letter of intent to acquire the American company Acreage (OTCQX:ACRGF) and quite a few other companies are doing business in the CBD fields, for example Aphria (APHA) acquired an American CBD beverage company named SweetWater Brewing or when Aurora (ACB) declared the acquisition of a CBD company named Reliva six months ago.
Today there are many American companies that dominate many areas in the US and even when regulation will allow Canadian companies to start to operate in the US, will they really have a competitive advantage? I am not at all sure that wealthy American companies that hold all stages of the value chain from growth, processing to distribution will rush to “make an exit” with Canadian companies whose reputations are significantly damaged due to the wasteful policies of most. As we progress over time without the Canadian companies reaching American customers, the domination of the American companies will be very hard to be undermined. The same goes for cigarette/beverage companies and in the future also pharma who will join the cannabis celebration as soon as they are allowed.
The Canadian advantage in my opinion will expire if it has not expired already.
Disclosure: I am/we are long CURLF, GTBIF, MSOS, CRLBF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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