Nearly everything worked in 2019 except for public marijuana stocks, as this list of last year’s returns for the longest running marijuana ETF and some of the most popular cannabis stocks shows:
- ETFMG Alternative Harvest ETF (MJ): -29% in 2019
- Canopy Growth (CGC): -22%
- Cronos Group (CRON): -26%
- Tilray (TLRY): -76%
- Aurora Cannabis (ACB): -56%
- Aphria (APHA): -8%
So what will make public cannabis equities work in 2020 and beyond? The answer comes down to additional legalization and a more homogenous (ideally Federal) regulatory framework so that the industry can better grow and scale. Therefore, here is our outlook for the US marijuana industry on the political front this year:
#1: Public marijuana stocks are a call option on a win by a liberal Democratic candidate in the 2020 Presidential election.
- Most Democratic presidential candidates have included legalizing marijuana federally in their campaign platforms. The one exception: Joe Biden, who said he would not support legalizing marijuana because there has “not nearly been enough evidence” on “whether or not it is a gateway drug” (quotes from a town hall event last fall). He has since walked back those remarks after pushback and said the drug should be “totally decriminalized”.
- The latest Democratic candidate betting odds from PredictIt.org – a website that allows users to place small-money wagers on a slew of political outcomes – gives Joe Biden a narrow lead (37%) to win the party’s nomination. Bernie Sanders (35%) and Elizabeth Warren (11%) – both strongly in support of national marijuana legalization – come in second and third.
- As for their chances in the general election, odds that either party wins the Presidency in 2020 according to PredictIt is currently neck and neck: Republican (52%) versus Democratic (50%). Aside from the executive branch, PredictIt shows odds for who will control the Senate after 2020 heavily favors Republicans (72%) over Democrats (29%). PredictIt users expect Democrats (73%) over Republicans (31%) to control the House after 2020.
The upshot: Public marijuana stocks would most benefit from a Democratic sweep in the 2020 elections as that would enable faster national legalization. Congress will likely remain in gridlock, however, with Democrats holding onto the House and Republicans the Senate. However, Bernie Sanders and Elizabeth Warren have said they would take executive action to deschedule marijuana under the Controlled Substances Act, which would essentially legalize the drug at the Federal level.
#2: There are also several states trying to legalize cannabis legislatively or by ballot this year.
- Many Democratic Governors failed to legalize recreational marijuana use and sales through their state legislatures last year, most notably New York and New Jersey. Last week, New York Governor Andrew Cuomo pledged to legalize marijuana in his state by the end of the year at his State of the State address. He also said he “intended to coordinate New York’s plan with similar efforts in Pennsylvania, New Jersey and Connecticut”.
- Instead of passing cannabis adult-use and sales legislatively in New Jersey, its state legislature voted in favor of putting the issue on the ballot to let voters decide this November. Moreover, the secretary of state’s office in South Dakota recently confirmed that a measure to legalize retail cannabis has officially qualified for the ballot in November as well.
- There are also many other states where advocates are trying to collect enough signatures to put marijuana legalization up for a vote in the 2020 elections. Forbes recently aggregated a list of where retail cannabis could be on the ballot in November, including everywhere from Arizona and Arkansas to Florida and Montana. Here is a link to the full list.
Bottom line: Further legalization in US states tends to fuel enthusiasm for public cannabis stocks. Passing adult-use and sales in highly populous states with big cities, such as New York and New Jersey, could also meaningfully boost momentum for the US legal marijuana industry. Lastly, we think New York Governor Cuomo’s intention on coordinating efforts with bordering states could help clear up some of the regulatory confusion for marijuana businesses that currently have to navigate patchwork state laws. But all that said, legalizing marijuana on a state by state basis is still a difficult route for the industry, as it leaves many existing challenges that come with its Federal illegality.
In sum, we believe the performance of public marijuana stocks hinges on a pathway to Federal legalization in the US. Only Canadian marijuana companies can list their shares in the US because it is nationally legal there, whereas US marijuana companies have to list their shares over the counter in Canada. Legalizing marijuana in the US would give Canadian marijuana companies already listed in the US a larger total addressable market. Canada only has a population of 38 million, less than that of California (40 million).
For example, Canadian marijuana producer Canopy Growth has already secured the right to buy one of the largest US growers, Acreage Holdings, once the US legalizes the production and sale of marijuana. That would afford the company entrance into the US as soon as it is federally allowed. Again, that’s just one example, but it shows the opportunities that US national legalization could enable in terms of M&A and consolidating the industry. On top of that, Federal legalization would open the floodgates for acquisitions by food/tobacco companies.
Suffice it to say, the US 2020 elections will be the single most important event for the legal marijuana industry for several years to come. It will determine if cannabis will be federally legal in the US within the next 5 years. If you don’t think that will happen, stay away from these names.