Op-ed: Hashish traders are on the verge of a legislative tailwind in Washington
Cavan Images | Cavan | Getty Images
Hunter S. Thompson famously coined the phrase “Buy the ticket, take the ride.”
Investors should heed the words of the cannabis iconoclast when considering whether, and especially when, to invest in the burgeoning but booming US cannabis sector.
Last week, Senate Majority Leader Chuck Schumer spoke about short-term cannabis laws that could “speed up the ride” and apparently handed out the schedule of when investors should stamp their tickets.
Cannabis stocks had another big week but may not be leaving the station until now.
Despite its complexity, the federal cannabis reform is long overdue. Despite federal headwinds, the industry continues to grow as states legalize medical and adult cannabis programs, with a view to tax breaks, massive job creation, social development, and the mere ratification of people’s will.
For investors who have already “bought their tickets”, the journey was volatile – sometimes uncomfortable – but it is worthwhile if they have invested in one of the many high-quality integrated operators or selected secondary games.
These companies have shown that despite headwinds from criminal taxation, lack of access to traditional capital markets, and lack of access to US stock exchanges, they can be profitable.
A look at the performance of the top five US market cap companies in this sector (Curaleaf, Green Thumb, Cresco Labs, Trulieve and Terrascend) shows year-to-date performance of 25% to 35% and a rolling year performance range of 105% (Curaleaf ) up to 420% (Terrascend).
Schumer’s comments over the past week have suddenly changed not only the timetable, but also the scope of what realistic and effective legislation could look like.
What did Schumer say?
Senate Majority Leader Chuck Schumer (D-NY) speaks during a press conference at the U.S. Capitol in Washington, DC on January 26, 2021 in Washington, DC.
Tasos Katopodis | Getty Images
Last week, Schumer, along with Sens. Cory Booker, DN.J., and Ron Wyden, D-Ore., Issued a joint statement that clearly affirmed that passing cannabis reform laws in this Congress is a priority for the new leadership .
With this, the US cannabis debate moves once and for all from whether reform will take place to when and how it will be implemented.
Their plan is to publish a new omnibus cannabis reform law that will address the de-planning and / or decriminalization of cannabis at the federal level (so that states can regulate cannabis within their current regulatory framework).
The legislation would also include long overdue restorative justice provisions to rectify the wrongs of the decades-long failed war on drug, banking, and capital markets regulations to get U.S. cannabis operators to bank and list in the U.S. (as opposed to Canada) can long overdue updates to federal tax legislation.
With a Democratic majority in both houses of Congress in conjunction with the Biden White House, the issue of cannabis reform has been elevated to a matter of national concern that is now routinely discussed.
For investors looking to take the next step, federal legalization may well apply to not just the top five players, but also to the next level of operators in the US, as well as select top tier operators in Canada that have strategically mapped a A US strategy brings significantly higher performance.
The performance outlook is not just about the fundamentals of the sector’s growth (with an average annual growth rate of 25% and total available market of $ 120 billion by 2030), but also about the river-side institutional capital that will inundate these stocks higher.
The Reddit Rebellion’s battle cry was “follow the rivers”.
For cannabis investors, the flows will be a big part of the drive as the world’s largest mutual funds, pension funds and hedge funds can finally get into the industry and “touch the plant.”
Also part of the “ride” is multiple re-evaluations for cannabis companies in line with other high-growth sectors.
A recently published report by Andrew Partheniou from Stifel presented an analysis in which American cannabis operators are appropriately equated with traditional consumer goods companies. However, in a federal environment, U.S. cannabis companies are highlighted with a 2.5x higher EBITDA margin by 2021 and a 38x higher EBITDA margin by 2021e growth rate, but trading similar ratings for EBITDA of EV / 2021 … has a ~ 20x uptrend just to trade on a similar level as their mature counterparts. “
There’s no way to gloss it over: US multi-state operators will be faced with a somewhat winding journey before their values multiply many times over. So far, federal cannabis policy reform has been a slow and often excruciating process for industry.
Rather than focusing on the micrograph of daily legislative battles or the timing of reform approved by each Congress Chamber, bullish cannabis investors must see themselves on the doorstep of the end of the cannabis ban.
The short-term perspective sees the strangling of laws like the SAFE Banking Act as problematic for capital. whereas the macro view understands that Biden’s election and a Democratic Senate point to a better path for legalization.
With a form of legalization already at play in over 40 states (medical or recreational), cannabis is fast becoming an important investment allocation for consumer goods. Valuations that used to be considered high are now looking extremely attractive as both profitability growth and legislation provide tailwind for a sector that is just getting started.
Do you already have your ticket?
Tim Seymour manages the Amplify Seymour Cannabis ETF, ticker $ CNBS, and is an executive member of the investment team at JWAM, a cannabis-focused hedge fund.
Brady Cobb is the CEO of Bluma Wellness, a South Florida-based cannabis MSO that was recently acquired by Cresco Labs, and has been actively involved in cannabis policy and government relations initiatives for the industry.