🍑Georgia Senate Runoffs – Implications for Cannabis
🌊The Blue Wave is a huge positive for the 🌿Green Rush
The race seems close but Democrats are the overwhelming favorites to win, with the remaining vote from heavily Democratic counties. Raphael Warnock has been declared the winner by The Associated Press and multiple sources has Jon Ossoff as the winner (The New York Times). The Senate is now split (50 Democratic, 50 Republican), with Vice President-elect Kamala Harris representing the tie-breaking vote when needed. The Democratic party will now effectively control the House, the Senate and the White House, which will drive pro-Cannabis initiatives.
What this mean for Cannabis
Priorities. Where Cannabis is prioritized on the agenda is still in question. Kamala Harris discussed the need for cannabis reform in her VP debate, but there are a number of issues that could get more mindshare (COVID, taxes, health insurance, etc). Cannabis could also be included in broader bills (vs. stand alone bill). For example, the SAFE Act was included in previous House version of stimulus bills.
Significantly de-risked. U.S. cannabis stocks traded up +6.2% on average today (based on U.S. Cannabis ETF MSOS) as capital flowed into the sector following this significant de-risking event. $AYRWF +9.9%, $TCNNF +8.9%, $CURLF +8.3%, $GTBIF +7.6%, $CRLBF +3.8%, $CCHWF +3.5%, $TRSSF +0.5%, $JUSHF -2.0% (down given C$35.1M equity offering, but impressively closed at C6$.76, above the C$6.50/share offering price)
STATES Act. The STATES Act would make cannabis federally legal within states where cannabis is legal (for medical or adult-use), allowing States to decide how to regulate Cannabis.
MORE Act. Last month, the US House of Representatives voted in favor of passing the MORE (de-schedule and remove cannabis from the Controlled Substances Act, expunge historical cannabis convictions related to non-violent offenses). Although the MORE Act will need to be re-introduced, the prospects of it moving to the Senate and eventually being brought into law is significantly improved.
SAFE Banking Act. The SAFE Act passed in the House 15+ months ago, but it has yet to see much traction in the Senate. With the Democrats improved ability to control the flow of legislation through the Senate, the prospects of Cannabis companies being able to access more traditional forms of capital and banking could help decrease the overall cost of capital, improve growth, and increase operating efficiency.
Valuation / Opportunity
Sector valuations remain reasonable. While several U.S. operators have seen their stock increase 100%+ in the past year, sector valuations remain attractive. The average multiples are still ~4-5x 2021E EV/Revenue and ~15-18x 2021E EV/EBITDA, with additional upside given strong fundamental performance, high growth, and additional institutional capital flowing in (MSOS still has $180M in cash to deploy).
Uplisting. Either the STATES or MORE Act would likely open up the capital markets for publicly-traded Cannabis companies, allowing them to uplist to major exchanges, increasing access to retail and institutional investors, thereby increasing valuation multiples.
Strategics enter. CPG Companies were already digging around Cannabis over the past 4+ years, but this could be the push needed for major CPG companies (and Pharmas) to enter the space (beyond just the Alcohol & Tobacco companies that have already made plays).
Moats impacted. It’ll be interesting to monitor how companies like IIPR (flat today) are impacted as their competitive moat (along with other Cannabis-focused REITs) disappear if Cannabis companies are able to tap traditional bank financing for CapEx or traditional REITs enter the market.