Legalisation bids boost outlook for US cannabis industry

LOS ANGELES: Uncle Sam gave marijuana lovers more reason to celebrate this week as a bipartisan group of lawmakers in the House of Representatives passed a bill that would make it easier for cannabis companies to do business in states where sales are legal.

The vote on the Secure and Fair Enforcement (SAFE) Banking Act took place a day before Apr 20 - or 4/20 - the unofficial holiday that commemorates all things marijuana.

The cannabis industry is making strides in other ways as well. Since the November elections, several states, most recently New Mexico and Virginia, have taken steps to legalize marijuana sales for adult recreational use. Others, including New York, New Jersey and Arizona, have also gone that route. And more states are expected to follow suit.

“From a policy perspective, state by state, municipality by municipality, there’s more political will to legalise, which is going to help bring on more markets and add to the sales we have,” said Jason Wilson, banking and cannabis expert at exchange-traded funds provider ETFMG.

The flurry of states legalising cannabis prompted analysts at Cowen to update their forecast for the U.S. recreational cannabis market to US$41 billion by 2025, an increase of US$1 billion from Cowen’s previous forecast.

Including illicit and medical marijuana sales, analysts expect the total market for cannabis in the US will climb to US$80 billion by 2025 from a projected US$65 billion this year.

Another bright spot for the industry: robust demand. Adult recreational marijuana sales climbed sharply in the first three months of this year in California, Massachusetts, Illinois and a few other states that have been allowing such sales for at least a year.

Sales in California, the nation’s biggest legal cannabis market, jumped 36.4 per cent to US$1.2 billion in the first quarter versus a year earlier, according to industry tracker Headset. In Michigan, sales skyrocketed almost fivefold to US$232.07 million, while Colorado's sales more than doubled to US$439.7 million.

All told, 16 states allow marijuana sales to adults now. Some of the recent converts, including New Mexico and New York, are not expected to begin allowing sales until next year. All but a few states already allow some form of access for medical use.

Cowen’s analysts expect that Connecticut and Rhode Island will be next to legalise adult-use cannabis.

The industry is eager for changes to federal laws that limit cannabis companies’ access to banking and other services. Progress at the federal level would also help drive cannabis stocks higher, said Greg Bassuk, CEO of AXS Investments.

“The environment has been ripe ever since the last election, but the catalysing move for bigger jumps in stock prices is going to be total federal approval,” Bassuk said.

Cannabis stocks surged last fall after voters in New Jersey, Arizona and three other states cleared the way for expanding legal sales of marijuana. Medical and adult-use cannabis sales combined jumped 58 per cent in the US last year to about US$19.2 billion, according to Cowen.

Recently, cannabis stocks have lost ground amid uncertainty over whether President Joe Biden will budge on his opposition to legalising marijuana at the federal level. Biden has said he would decriminalise - but not legalise - the use of marijuana. In addition, a rally in cannabis stocks fuelled by the same social media chat rooms that sent GameStop shares skyrocketing in January faded after peaking in mid-February.

The ETFMG Alternative Harvest ETF, which has more than US$1 billion in assets under management, has fallen 56.4 per cent since Feb 10. The ETF, which focuses on cannabis stocks, is still up about 80 per cent from 12 months ago. Shares in some of the biggest marijuana companies, including Tilray, MedMen Enterprises and Aphria, have doubled this year.

Meanwhile, the benchmark S&P 500 index is up about 11 per cent this year and 52.5 per cent above where it stood a year ago.

“If you look at just the last two months, you’ll see a lot of stocks have sold off pretty sharply,” said Garrett Nelson, senior equity analyst at CFRA. “We view this as a buying opportunity.”