With Democrats controlling the Senate, the path to legalization in the U.S. is now clear
It’s game on for the marijuana sector after the Democrats took control of the Senate, completing a Blue Wave in U.S. government.
Democrats Jon Ossoff and Raphael Warnock won their run-offs to tie the Senate at 50-50, with vice-president elect Kamala Harris serving as the tie-breaking 51st vote.
Court challenges appear unlikely given the violence at the Capitol yesterday and the results clear they way for a monumental year for marijuana stocks. Horizons ETFs, which launched the world’s first weed ETF back in 2017, saw considerable movement in the build-up to the state run-offs. Yesterday, its Marijuana Life Sciences Index ETF (HMMJ), which has a Canadian focus, was up 11%, while its US Marijuana Index ETF (HMUS) was up 10%.
Mark Noble, EVP, ETF Strategy, told WP this could be the biggest year in history for marijuana stocks given the potential unleashed by this clear path to legalisation. In December, Congress passed the MORE Act, which would legalize cannabis, expunge criminal records and allow the Federal government to exercise tax on marijuana and marijuana products. Senate approval had little chance under Republican control but that is now set to change.
For Noble, however, the consequences for the industry are seismic. He said: “This will allow banking and investment dollars to start pouring into the space to build it, and a lot more investment from large institutions that have for the most part shied away because of the gray legal area around it.”
Counterintuitively, he added, legalization in the U.S. actually benefits Canadian LPs more than the U.S. multi-state operators (MSOs) because it gives them the green light to enter the U.S. market. “Of course, these stocks all have U.S. listings, they have access to U..S stocks and investors, and they can take that capital now, go into acquisition mode and potentially enter the marketplace," he said.
“There’s a path to profitability for the LPs that didn’t exist a day or two ago, which is why there's as fervor around getting into this sector and, potentially, you know, providing some momentum over the next couple of months.”
With high valuations but relatively poor balance sheets, Canadian LPs now have an avenue to generate positive earnings, which boost their stocks. For U.S MSOs, which already generate billions in sales - $15 billion in 2020, with California earning $300 million a month alone – they also have a potentially golden opportunity to penetrate the U.S. stock market after being limited to Canada on smaller exhanges.
Noble said: “I still believe that once these U.S. companies can get listings in the U..S, and people can actually look at their stock price relative to others, the valuations of these stocks will really start to take off because for the most part, businesses in the U.S. are generating a high level of revenue relative to enterprise value.”
While stocks have already moved significantly in anticipation of this, Noble believes there is scope for more momentum because U.S retail investors have not really caught on.
“If you remember how organizations in Canada captured the imagination of Canadian retail investors, I would imagine that something similar could happen now where the US investors start to come in in a big way to names with U.S. exposure.”
