As of late October 2022, nineteen US states and the District of Columbia legalized the use of recreational marijuana. Thirty-nine states have legalized cannabis for medical use.
On October 6, 2022, the Biden administration and President made a statement on marijuana reform, taking three steps toward federal legalization:
- The President pardoned all prior Federal offenses of simple marijuana possession.
- The President urged all Governors to follow regarding state offenses.
- The administration asked the Secretary of Health and Human Services to initiate the administrative process to review how marijuana is scheduled under Federal law.
Marijuana is currently a Schedule I drug under the Controlled Substances Act, the classification for the most dangerous drugs. Cannabis’s classification puts it alongside heroin and LSD under the Act and is even higher than fentanyl and methamphetamine, the drugs driving the current overdose epidemic.
The statement goes a long way but stops short of Federal marijuana legalization.
Only a matter of time
- There is support for federal marijuana legalization.
- Tax revenue considerations are a compelling reason for legalization.
- Only eleven states have yet to legalize medical marijuana.
- Cannabis is on the ballot in some of the thirty-one states that have yet to legalize recreational marijuana.
Marijuana companies suffer from a lack of federal legalization
- Federal illegalization prevents credit card payments for purchases in legalized states.
- Marijuana producers and distributors cannot access lines of credit from financial institutions to support their businesses.
- Crossing state lines from legalized to non-legalized states creates logistical challenges for US cannabis companies.
The top marijuana companies’ shares remain in bearish trends
- Curaleaf (CURLF) is the leading cannabis company traded on the US stock exchange by market cap. At $5.235 per share, it had a $3.287 billion value. CURLF fell from a high of $18.38 in February 2021, a 71.5% decline.
- Tilray (TLRY), at $3.63 per share, has a $2.158 billion market cap. TLRY fell from a high of $300 per share in 2018, a 98.8% decline.
- Canopy Growth (CGC), at $3.15 per share, had a $1.436 billion market cap. GGC traded to a high of $59.25 in October 2018 and dropped nearly 95%.
- Verano Holdings (VRNOF), at $5.215 per share, is worth $86.6 million. VRNOF fell from $28 in February 2021, an 81.4% drop.
Industry consolidation is on the horizon
- The absence of US Federal legalization has caused growth in cannabis stocks to stagnate.
- The inability to grow has led to cash burn and disappointed investors.
- As market caps shrink, the potential for consolidation and M&A activity rises.
- Companies are likely to join forces to survive or suffer from hostile takeovers.
Big tobacco stands to gain the most
- The leading tobacco companies are cash-rich, pay significant dividends, and are natural acquirers of cannabis companies. Tobacco has been a shrinking sector; marijuana offers expansion. The leading cannabis companies offer know-how and infrastructure.
- At $46.31 per share, Altria Group (MO) has over an $81.793 billion market cap and pays shareholders a $3.76 or 8.12% dividend.
- At $92.53 per share, Philip Morris (PM) has a $138.8 billion market cap and pays shareholders a $5.08 or 5.49% dividend.
- Big tobacco stands to gobble up the cannabis companies in accretive takeovers when Federal legalization occurs.
- While the leading cannabis companies’ shares should move higher, big tobacco could pay far below the record highs for the shares and will likely profit from eventual legalization.
Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!