As Marijuana Stocks Light Up On Legalization Hopes, Analysts Bring Cold Water

Canopy Growth stock holds a 64% year-to-date gain, even after a big sell-off Thursday. Aphria stock has more than twice that gain. Tilray stock rose 51% Wednesday alone — then tanked, ending the week with a 13% gain.


As marijuana stocks take a ride to the moon and back, analysts have tried to keep investors’ glee within the gravitation pull of planet Earth, though not always with great success.

With a new Democratic president and Congress, the year ahead for North America’s cannabis stocks will largely hinge on the prospects — and complications — of wider legalization in the U.S. Senate Majority Leader Chuck Schumer and other top Democratic lawmakers this month signaled openness to tearing down pot prohibitions.

But broad U.S. legalization, analysts say, is far from guaranteed and could be years away. Ambitious legislation, nationally or in individual states, often undergoes a shearing on its journey to a signature. U.S. lawmakers will have other battles — namely, squashing the coronavirus pandemic.

“I’m not sure the first fight will be cannabis,” said Mitch Baruchowitz, managing partner at Merida Capital, who follows marijuana stocks. “I don’t think bills always take the shape people think they will. Our government tends to negotiate a lot.”

Canada’s producers — which represent the bulk of marijuana stocks trading on U.S. exchanges — will be looking to cultivate big opportunities in the U.S. to offset struggles at home. They had the advantage of Canada’s legalization measures early on while U.S. operators remained restricted. But they are also struggling to bring costs under control in pursuit of still-elusive profits.

Despite the caution, cannabis stocks have gone vertical, aided by the Nov. 3 election and an excitable retail investor crowd. Over the past week, there were signs the Reddit board WallStreetBets, the meme-stock nexus that encouraged binge buying of GameStop (GME), was egging on the rally. The exact identities of the most vocal cheerleaders remain murky, though.

Marijuana Stocks Rocket Higher

This week’s trading vaulted cannabis stocks, most of which were already extended in price, to mind-boggling gains. Disciplined investors who locked in profits were surely relieved they had stepped aside when the stocks tumbled from their heights Thursday.

Shares of Canopy Growth (CGC) rallied 63% in January. In February, they rose as much as 41% to an intraday high Wednesday. Thursday they fell 22%.

Canopy Growth reported a large quarterly loss Tuesday. But the Canadian pot producer’s sales beat expectations, and its view on profitability became clearer. CEO David Klein said any potential legislative reform “could allow Canopy to enter the U.S. THC market during calendar 2021.”

Elsewhere, Aphria (APHA) is up 145% since the start of the year, though that’s down from a year-to-date gain of 267% in intraday trading Wednesday. Aphria received an added boost from news that it will merge with rival Tilray (TLRY), which recently announced expansion moves in the U.K. and Europe.

Tilray stock is up 251% for 2021, even after the past week’s round-trip ride. It saw the kind of action that tends to signal WallStreetBets/Reddit traders.

The industry buzz has also boosted the shares of Wakefield, Mass.-based Curaleaf (CURLF), a large cannabis grower and retailer in the U.S., and Innovative Industrial Properties (IIPR), a Park City, Utah-based real estate investment trust that acquires pot growing facilities and other real estate in the U.S.

Among ETFs, ETFMG Alternative Harvest (MJ), Cambria Cannabis (TOKE) and AdvisorShares Pure Cannabis (YOLO) are also along for the ride.

Outlook For Marijuana Stocks

Investors in Canadian cannabis stocks hope new U.S. laws will set the companies free to tap more of the world’s largest pot market. However, even if U.S. federal cannabis restrictions evaporated tomorrow, most Canadian pot producers looking to grow and sell weed here would find themselves with little U.S. infrastructure. Competition would be heavy, and state-by-state regulations would present a series of potential minefields.

For the U.S. operators, questions linger about competition with the illegal market and the impact of the pandemic, which has shaken up consumption habits, logistics at dispensaries and shift rotations at production hubs. Further out, questions remain about where, and how, the industry will consolidate if interstate boundaries fall.

For now, legal cannabis sales in the U.S. this year are expected to jump 31% to $23.9 billion, according to industry tracker Headset. In Canada, sales are also expected to rise 31%, although to a much smaller figure — 4.6 billion Canadian dollars ($3.62 billion U.S.), according to Cowen.

Those sales would increase in tandem with the public’s acceptance of pot use. Fifty-six percent of people want to legalize marijuana, according to the January IBD/TIPP poll. Fifty-four percent generally believe legalization would benefit society.

Biden’s Victory Garden?

Those numbers, which help buoy marijuana stocks, track alongside President Joe Biden’s election support in November. In addition, during the November election, five states — New Jersey, Arizona, Montana, South Dakota and Mississippi — voted to legalize cannabis in some form. That brought the total number of states that have legalized recreational cannabis to 11, along with Washington, D.C. Thirty-four have legalized it for medical use.

Then, in December, the Democrat-led House approved the MORE Act. States would decide whether to allow sales under that law. But it would federally decriminalize cannabis and expunge records related to marijuana offenses.

A month later, Democrats, after two runoff elections in Georgia, snagged two additional Senate seats. That puts Democrats and Republicans at a 50/50 split in the Senate. With Vice President Kamala Harris providing the tiebreaking vote, Democrats now ostensibly have the votes to ram through pot legislation, if they so choose.

This month, Schumer said he told Biden’s Justice Department nominees that the department should “respect the rights of states that have legalized marijuana.” A day earlier, Schumer, Sen. Cory Booker and Sen. Ron Wyden also said they would make “consideration” of cannabis reform a priority in 2021, with plans to release a “discussion draft” on the subject in the early part of the year.

“The War on Drugs has been a war on people—particularly people of color,” the statement from the lawmakers said.

Legislation: The MORE, States And SAFE Acts

Still, less sweeping legislation might be more palatable to Congress. Such limited measures probably wouldn’t clear the way for a Canadian stampede into the states, as some investors in marijuana stocks envision.

The States Act, launched by Senators Cory Gardner (R-Co.) and Elizabeth Warren (D-Mass) in 2018, would leave pot legislation up to U.S. states but still prohibit selling cannabis across state lines. Narrower measures, like the SAFE Act — introduced in the House by Colorado Democrat Ed Perlmutter in 2019 — would give the marijuana industry access to banking. Other bills would open up insurance and allow cannabis businesses to take standard expense deductions.

All of those measures would be welcomed by an industry where the duffel bag stuffed with cash is often the standard payment medium. But Cowen analyst Vivien Azer says the MORE Act is the “most straightforward mechanism” to open the gates for international cannabis operators to enter the U.S.

That law, jointly launched in the House by Jerry Nadler (D-N.Y.) and then-Sen. Kamala Harris in 2019, would need to be reintroduced by the new Congress (the Senate did not follow through on the House passage in December). But even with a Democratic majority, Azer says, the odds, for now, remain slim.

Invasion Complications For Marijuana Stocks

Hemp — legally defined as cannabis plants that contain almost none of the buzz-producing chemical THC — went legal in the U.S. in 2018. Some Canadian producers quickly moved to secure a place in the market for CBD, the relaxing substance often found in hemp that has made its way into lattes and topical creams. But efforts to gain similar permissions for THC product sales would require far heavier lifting.

A more open U.S. market would require Canadian producers, generally still a money-losing bunch, to build grow-houses and manufacturing facilities from the ground up in the states. It would require navigating each state’s licensing requirements, an often costly process in which some states move faster than others.

Even so, marijuana and THC-based products are now legally and readily available in many states — but only from U.S.-based companies. And the rules governing sales and business licenses for those products are a rat’s nest of red tape.

Some states cap the number of licenses they hand out. Other states, like Florida, require vertical integration. In other words, businesses have to handle cultivation, processing, manufacturing and retail operations. Those stores are only allowed to sell that company’s products.

“There’s just a state-by-state patchwork of regulations that these operators are working with now,” Piper Sandler analyst Michael Lavery said. He added: “These are all states that have allowed and created programs for their own tax and job purposes, oftentimes as a motivator.”

Preparing To Move South

So where does that leave marijuana stocks? Legalization would allow Canopy Growth to activate the arrangement it already has in place for U.S. weed sales — namely, an agreement for Canopy to buy U.S. peer Acreage Holdings once lawmakers allow nationwide sales. Canopy also has investments in Terrascend, which operates in Canada and the U.S.

How well Canopy Growth and its Canadian rivals might handle expansion into the U.S. is also a question.

Companies like Tilray are expanding into new, though still small, medical markets in Europe. But the industry has, in general, been retreating from the international stage to cut costs. And Canada’s homegrown problems persist: too much weed production, a parade of write-downs on investments that didn’t pan out, and more efforts to scale back operations.

“The Canadian market has become a large, but largely predictable, market,” Baruchowitz said.

But more dispensaries are opening in Ontario, which accounts for around 40% of Canada’s population. That has helped lift a major barrier to sales growth and frequent source of executives’ complaints in previous years. And as business becomes more predictable, more companies are gesturing — sort of — toward the possibility of profits.

Tilray in November said it is “poised to deliver positive or break-even adjusted EBITDA in the fourth quarter of 2020.” Similarly, Canopy, in February said it was “in a position” to set a target for positive adjusted EBITDA in the second half of its fiscal 2022.

Over the past two years, however, the industry has made a habit of softening its profitability goals.

“We generally have opted to take a more cautious view on profitability for the Canadians, relative to management commentary, given the challenges that the companies have faced in meeting prior projections,” Azer said.

Cannabis Stocks Chart Action

But even as profit worries endured, U.S. and Canadian marijuana stocks swept higher at the start of the year. So did ETFs such as Cambria Cannabis and ETFMG Alternative Harvest. Market valuations have become swollen. Canopy Growth’s value stands at $15.1 billion. Tilray stock weighs in at $4.3 billion.

As a result, Canadian cannabis stocks on the big U.S. exchanges are now well extended from what would be considered proper buy points, according to technical analysis. Those stocks require some serious price consolidation before any CAN SLIM-type buying opportunities emerge.

U.S.-based stocks Innovative Industrial Properties and Curaleaf have remained somewhat more grounded. Innovative is trading 15% above its 10-week moving average, while Curaleaf stands 22% above that line. Both are moderately extended but they haven’t been going vertical like their Canadian counterparts. A pullback to the 10-week or consolidation would offer investors new entries.

U.S. Cannabis Stocks And Covid

In the U.S., marijuana stocks also face questions of competition, overexpansion and profitability, even with a legislative boost from Democrats. In addition, they face questions about how much the coronavirus pandemic has remolded the industry.

One possible positive: The pandemic could drive more legal purchases. Under that scenario, fractures in the supply chain could complicate the shipping of legal and illegal goods alike. Executives also argue that customers worried about getting infected might avoid products with uncertain origins or order online to minimize physical contact with their dealer.

The pandemic has “expedited that (e-commerce) development by the tune of five to 10 years, automatically,” Charlie Bachtell, CEO of U.S. operator Cresco Labs, said of the pandemic’s impact on digital orders. “Without question, there is going to be more of that online ordering, delivered-to-the-house consumer activity in cannabis than pre-Covid.”

Unlicensed Shops, Shift Rotations

Accounts from some authorities complicate that narrative, offering additional reason for caution around marijuana stocks. In Los Angeles, one of the nation’s biggest pot markets, police are still trying to stamp out unlicensed marijuana stores. Estimates for the number of those stores vary, with some ranging into the hundreds.

“In a nutshell, I haven’t seen any changes,” said Vito Ceccia, a detective with the Los Angeles Police Department’s cannabis support unit. “You have to understand that that’s the illicit market.”

He also noted that the legal market is more vulnerable in some ways to the pandemic than the illegal one.

“If there’s a statewide shutdown, they have to adhere to that, whereas the illegal market doesn’t,” he said.

The pandemic has jostled the marijuana business in other ways. Bachtell says that in response to the pandemic, Cresco limited some in-store displays, as customers spent less time in dispensaries. Staff spread out tables in its Chicago store’s consultation space. The company also added more express lines for pickup orders.

Bachtell did not have specifics on coronavirus cases at the company, which has more than 2,000 employees.

On the production side, he says, complications have arisen from contact tracing and scheduling. Efforts to keep fewer people on the assembly line, where people sometimes used to work a foot apart, have added to the difficulty. The company has tried to minimize overlap between shifts. It has turned away from experimental products to focus on higher-demand ones.

Weed Tourism Shut Down

Green Thumb Industries, another U.S. operator, has added touchscreen kiosks in stores to handle orders. GrowGeneration (GRWG) — a store chain that sells soil, nutrients, hydroponics and other supplies to individuals and the industry — stockpiled gloves and cleaning products.

“We saw a 200% increase in tents, where people grow in their homes,” GrowGeneration CEO Darren Lampert said. “They use tents in their basement.”

Planet 13 — a large, mall-like dispensary in Las Vegas that packs psychedelic visual displays, a restaurant and an edibles factory into a former beer distribution center — faced a tourism shutdown that left casinos and hotels vacant. Roughly 85% of its customers come from outside Nevada. The company decided to expand from doing a dozen or so deliveries a day to many more. As the pandemic sank in, it bought 30 delivery vehicles.

“No dealerships were open,” Planet 13 co-CEO Bob Groesbeck said. “We were looking, you know, in Arizona, in New Mexico, California, Washington state, just for dealerships to sell us vehicles.”

Groesbeck says Planet 13 has around 100 more employees than at the start of the pandemic. The company is moving forward with plans to add 40 registers to its dispensary space.

But the pandemic has reshaped the way the company sells weed. Pre-pandemic, Planet 13 would run more than 200 ad-wrapped cabs up and down the Strip. Some of that advertising muscle has moved to billboards along local freeways and local magazine promotions.

Before the pandemic, vapes and edibles were popular, as tourists, staying in hotels that barred smoking, sought discretion. Today, Planet 13’s local customers, who can smoke at home, are buying more bud, Groesbeck says.

Post-Prohibition Life For Marijuana Stocks

If and when U.S. lawmakers finally unshackle the industry at the federal level, businesses may run into complications unknotting themselves from the slew of banks and suppliers that enabled their expansion into new states. Streamlining operations could cost the marijuana industry jobs.

Bachtell says consolidating operations and potentially focusing on agriculture-heavy states could be part of the “longer-term evolution” of the industry. As cannabis settles into commodity status, the current regime of pot shops, with green cross symbols and names with vague nods to health and wellness, may start to dissolve.

“We have always been kind of cautious about being too brick-and-mortar retail focused,” Bachtell said. “Because (eventually, cannabis could be) available at Whole Foods, and it’s available with large-scale distribution that’s sent directly to the house, and Amazon is delivering it.”


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