The second half of 2020 began on a positive note for cannabis stocks as the Bloomberg Global Cannabis Competitive Peers Index gained 3.5% in July. While the benchmark remains 26.5% below where it started the year, we believe that March was a cyclical bottom within a secular bull market for the cannabis industry and U.S. operators will drive the next phase of growth.
The industry’s struggles are well-known. The lack of retail distribution in Canada, the FDA, tax and banking hurdles in the U.S., and illicit-market cannibalization on both sides of the border were just some of the headwinds; but when Pershing decided they would no longer custody cannabis-related securities into last year-end, the final cleanse was set to commence.
At the March 2020 nadir, the BI Global Cannabis Competitive Peers index had lost 92% of its value from the sector top in January 2018. That’s when COVID-19 arrived as a positive catalyst and crystallized the need for a legal cannabis industry and the tax-revenue and jobs that come with it; social justice initiatives also emerged to help shape the narrative.
As recently discussed, our base-case bull thesis is predicated on the continued legalization of cannabis at the state level. South Dakota, Montana, Arizona and New Jersey will vote on adult-use referenda in a few months, with New Jersey widely perceived to be the trigger for New York, Pennsylvania, Connecticut and Rhode Island to adopt similar measures.
Regulatory arbitrages offer additional upside, including the specter of a blue Senate or sweep, and the “Biden plan,” which would benefit existing U.S. multi-state (MSO) operators and pave the way for further expansion and scale. Legislation providing “safe harbor” for commercial banks to conduct business with cannabis companies is also half-way through Congress.
The cannabis industry is asking for one thing: a level playing field. Hemp farmers want FDA guidelines so they can monetize their crop; dispensaries want to accept credit cards and make bank deposits; scientists want to research the plant to solve medical riddles; and more than anything, companies need access to capital so they can fund operations and pay staff.
Given federal treatment of cannabis as a Schedule I narcotic, U.S. operators aren’t listed on the major U.S. exchanges and most banks won’t custody cannabis-related securities. That has left insiders, operators and Canadian retail to push those stocks around for the last two years. U.S. investors were largely unaware of the burgeoning sector, and most were unable to access it.
In late July, we discovered that U.S. institutions began to accumulate U.S. cannabis stocks on behalf of their clients. That may not sound like a big deal but for the ardent industry followers among us, it’s seismic. We’ve long spoken about the perception of cannabis as an asset class shifting from denial to migration, and that being driven by a thundering herd of U.S. investors.
Putnam Investments LLC, the Boston-based investment manager with more than $183 billion of AUM, emerged as a front-page holder of 4Front Ventures, a U.S. MSO, last month, according to Bloomberg. As of June 30, Putnam owned six million shares, or 5% of the outstanding float; and as we began to further explore the recent filings, we found that they weren’t alone.
Wasatch Advisors Inc., the Utah-based asset manager, is now the second largest holder of Cresco Labs Inc. and an investor in Green Thumb Industries, both Chicago-based MSOs, while Fidelity Investments is an investor in Curaleaf, the Wakefield, Massachusetts-based MSO. An industry insider recently confirmed to me that, “big institutional investors are buying big slugs, quietly.”
While these institutions’ compliance officers could change their minds about allowing access to the sector, the more likely read is that when you see an elephant or two, the herd isn’t far behind. Legitimate growth at reasonable multiples with an expanding total addressable market would excite any investor but for small-cap growth managers, it’s their lifeblood; and those animal spirits have now been unleashed.
As other portfolio managers await approval from upstairs, Advisor Shares announced plans to launch an exchange-traded fund (ETF) focused on U.S. multistate operators as early as month-end. If successful, it would create the first NYSE-listed vehicle that provides pure exposure to U.S. cannabis stocks and it could channel much-needed liquidity into the space.
There’s no denying that challenges remain for the sector, the markets and the world at large; and yes, the pandemic disrupted life as we knew it. But in time, as history reflects on 2020, we believe the emergence of the U.S. cannabis industry as an economic driver and job creator will be seen as one of the most important and positive progressions of this era.
