The cannabis industry has endured an endless array of negative news over the last two years, from regulatory snafus and delays to the illicit market vaping crisis and more. The resulting demise of public cannabis stocks has been well documented, with the global cannabis indexes and widely held ETFs falling 70% or more from the beginning of January 2018 to their March 2020 lows.
For the first time in more than two years, however, there appears to be light at the end of the tunnel that isn’t affixed to the front of a train. The coronavirus pandemic has disrupted many lives and industries, but it’s also brought certain realities to bear; among them, the need for a legal and regulated global cannabis industry and the tax-revenues and jobs that come with it.
The timing couldn’t be better for the besieged industry and while the recovery won’t be linear, a framework for optimism has emerged. The stock market began to sniff that out last month as a confluence of factors drove cannabis stocks higher. Some context is important, as industry sentiment was extremely negative, and investors were positioned for further declines.
Large-Cap Cannabis Stocks Were Heavily Shorted
Large-cap cannabis equities were heavily shorted entering May despite many leaders trading near all-time lows. In fact, when we called around the street in search of a borrow (needed to short stocks) at the beginning of the month, we couldn’t locate a single share. That was proof positive cannabis bears had outstayed their welcome and were ripe to get caught off-sides.
Cannabis Deemed 'Essential" by House
The first hint that cannabis would benefit from the coronavirus pandemic emerged when it was deemed to be “essential” by most states; but when the U.S. House of Representatives included federal banking provisions in their most-recent relief bill, it was the proverbial shot across the bow. The Senate, for its part, is expected to weigh in on these measures next month.
While it remains to be seen if that legislation will pass prior to the election, it already has broad bipartisan support, the endorsement of the American Bankers Association, and added urgency given the virus potentially transmits via cash. Once the corporate conduits of capitalism open to U.S. cannabis companies, the cost and availability of capital will help transform the industry.
U.S. Operators Post Strong Growth
Despite the still-uneven playing field, leading U.S. operators reported blowout first quarter earnings, which was even more impressive given the challenging operating environment. We continue to believe 2020 will be back-end loaded as build-outs come online and economies of scale kick in, and expect the best is yet to come given the enormity of the addressable market.
A sampling of several top-line results:
Curaleaf(CURLF) has the largest footprint of branded retail cannabis stores in the U.S.; they generated $96.5M in quarterly revenues and sales growth that was 20% above estimates. Curaleaf has guided to $1B in annual revenues this year and is producing more revenue than Canopy Growth at 60% of the valuation.
Green Thumb Industries(GTBIF): is the leading money-maker among multi-state operators after posting Q1 revenues of $102.6M (vs. est. $92M) and EBITDA of $25.5M (vs. est. $18M). Competing for the #1 spot in Illinois and Pennsylvania, two important limited license markets, they produce more revenue than Canopy Growth at 30% of the valuation.
Trulieve(TCNNF): posted Q1 revenues of $96.1M (est. $91.8M) and EBITDA of $49.4M (est. $38.7M). We foresee Florida as the epicenter of U.S. cannabinoid wellness given the elderly population and 3.5X national prescription average, and this company dominates the state, producing more revenue than Canopy Growth at 20% of the valuation.
Importantly, the news cycle also turned, and the narrative surrounding cannabis shifted as several dynamics crystallized. Among them:
- New York, Pennsylvania, Tennessee, New Mexico and several other cash-strapped states championed cannabis legalization as a tool to help repair their broken budgets. New Jersey and Arizona, among others, have legalization on the ballot in November, adding pressure to their neighboring states.
- The University of Lethbridge announced trial results that demonstrated CBD helped to block the cells that enter the body from the novel coronavirus. While the results were pre-clinical and there is still much to learn, the press coverage helped reframe the conversation around cannabis from one of a discretionary vice to that of health and wellness.
- The U.N. announced that after a two-year delay, they will vote in December to reschedule the international classification of cannabis. The World Health Organization has already announced their support of reclassification and the U.N. has never voted against a WHO recommendation.
- Recent events have elevated social justice issues, which in turn has sharpened the lens on the inherent disparities created by the war on drugs and the prohibition of cannabis. We expect this dynamic to rightfully persist and grow louder until many of these wrongs are addressed and unwound; and provide the political cover to do so.
- The election is approaching, and the Senate is in play. If the Republicans lose control of the Senate, which is now the odds-on bet, federal cannabis legislation is expected to move forward regardless of who sits in the Oval Office next year.
As markets began to price-in these forward catalysts, we saw meaningful improvement in the charts. U.S. leaders reclaimed their 200-day moving averages, large-cap Canadian LPs broke through multi-year downtrends, and volume continued to trend higher.
While there are no guarantees in life, the market or politics, particularly in the midst of a global pandemic, it would appear that cannabis is one of the few industries poised to benefit in a post-COVID economy. The regulatory arbitrages alone—most notably, banking, which presumably would allow institutions to invest directly in U.S. cannabis companies—set it apart from other potential growth opportunities.
Looked at another way, cannabis companies must currently cope with onerous tax treatment, limited access to capital and a persistent century-long propaganda campaign designed to smear their product. Just imagine what they will do once a more favorable operating environment arrives and society becomes educated on the health benefits of cannabinoid wellness.