Why all signs point to a monumental year for cannabis stocks

Prospect of new legislation, and quick-moving Arizona, proves there is a roadmap to monetization, says portfolio manager

Why all signs point to a monumental year for cannabis stocks

This year is set to be a defining year for the cannabis industry, according to a portfolio manager.

Nawan Butt, portfolio manager at Purpose Investments, believes the stars are now aligning in the U.S. after a strong breakout of stocks in December continued into the new year, driving valuations to all-time highs. A Joe Biden Democrat administration has bolstered confidence, with firms taking the opportunity to strengthen balance sheets.

Many operators are now looking to switch gears from profitability to growth on the back of the increased probability of more progressive cannabis legislation, Butt said. Indeed, the Democrats announced they are putting together a new federal liberalization bill which draws on previous reform attempts.

Butt said: “The cherry on top of the action-packed month came from Arizona. The state rolled out its adult-use cannabis program only 80 days after the election. The execution shows there is a roadmap to quick monetization – good news for the industry elsewhere in the country as liberalization continues. 2021 could perhaps be the most significant date for cannabis investors in recent memory.”

With Democrats focusing on taxation, job creation, criminal justice reform and social equity, the end of cannabis prohibition is “proving to be low-hanging fruit”, with job creation just another added benefit. With more than 250,000 Americans already employed by the industry, the number is expected to easily double in coming years as the US tries to replace the three million jobs permanently lost due to the pandemic.

However, what remains up in the air is the scope of the next reform and its timing. Butt, who manages the Purpose Marijuana Opportunities Fund, said that, originally, the market anticipated some form of the SAFE Act to become law within the next six months and then further liberalization with the STATES Act and MORE Act further down the road. Recent comments, however, have suggested the senate is looking to consolidate and pass wider reform in a single shot.

Butt said: “Wide-scaling reform would make the industry much stronger, but at the same time could take much longer to become law. This, however, does extend the entry time investors have for taking on cannabis as a growth vertical for their portfolios.

“The corporate sector has rolled up its sleeves in anticipation of reform and is now working hard on the pivot to growth. Wider reform will open up competition in the space with new entrants and access to capital. To widen moats and develop competitive advantages, the US cannabis sector raised more than C$1.5 billion to shore up balance sheets and hit the accelerator. A new wave of US institutional investors is offering up capital at current prices and setting a valuation floor for many large operators.”

Concern was raised when January ended with valuations near all-time highs for the U.S. cannabis industry. However, when this tax-disadvantaged industry is compared to other peer groups of staples, beverages, tobacco or retail, Butt believes the valuations seem reasonable and even cheap in a best-case scenario.

He added: “Industry growth is defined by an increasing total addressable market, better access to financial services and limited licensing structures. All signs from investors, operators and legislators are pointing towards strengthening sentiment of cannabis proliferation. We’re looking forward to 2021 becoming a defining year for cannabis.”