Original Report Date: June 25, 2021
The cannabis industry is one of the most talked-about sectors by retail investors. As more states legalize marijuana there is a growing sentiment that we will eventually see legalization at the federal level in the United States. As of this writing, 37 states have legalized medical marijuana and 19 states have legalized recreational marijuana. Until we see marijuana legalized at the federal level, many of these companies will not have true access to the banking system or capital because of the prohibitions. This means many of the publicly traded stocks in this sector are listed in Canada where federal legalization took effect in 2018.
With weed stocks pulling back, we want to hit the refresh button to screen the industry and dive deeper into the companies that look interesting. Since the cannabis industry has a lot of hype, especially from retail investors, we still see frothiness in the market overall. There are passive marijuana ETFs available like $TCHX (holdings) and $MJ (holdings)., but in an industry that’s ripe for hype and over-priced assets, we want to dig deeper and find the best-valued companies to capture part of this growing industry.
The legal U.S. cannabis industry hit $17.5 billion in sales in 2020. Connecticut became the 19th state to legalize the recreational use of marijuana this week. A recent [report](https://www.prnewswire.com/news-releases/legal-marijuana-market-size-worth-84-0-billion-by-2028--cagr-14-3-grand-view-research-inc-301272212.html#:~:text=North America Legal Marijuana Market,15.5%25 from 2020 to 2027.) from Grand View Research estimates the legal market size to reach $84 billion by 2028. These positive trends have led to high interest in investing in and around this industry.
When digging into the industry, we should understand the growing, distribution, and dispensary parts of the business. Growing marijuana requires a specific climate to cultivate the flowers. Many of the states that have legalized weed do not have climates conducive to growing outdoors, so many companies have indoor growing operations. Today, cannabis is not allowed to cross state lines. For example, marijuana sold in Illinois must be produced in Illinois.
What about the illegal market? According to Merida Capital’s Mitch Baruchowitz, the estimated consumption of cannabis in the U.S. is around $100 billion. This means the legal market currently only consists of around 17.5% of the total consumption in the country. As more states legalize, this percentage will start to grow. A Gallup survey (results below), showed that the percentage of American’s believing that marijuana should be made legal has risen to 68%. Baruchowitz also explained that the legal market outgrew the illegal market for the first time in 2020. His theory is that safety, choice, access, and quality are the main drivers of the growing legal market, especially coming out of the global pandemic. Another aspect Baruchowitz considers in the long-term bull thesis for cannabis is if/when the medical industry researches and adopts marijuana - this includes how medical insurance will play out.
Cannabis laws in the U.S. and Canada have created an interesting dynamic in weed stocks. The Canadian licensed producers do not sell cannabis in the U.S. because it is against federal law, but they are allowed to be listed on U.S. stock exchanges because they operate legally in Canada. The largest producers are listed in the United States including:
Even though marijuana is not federally legal in the U.S., there are companies selling cannabis products in the United States due to state-level legislation. These companies operate in the United States, but cannot be listed on U.S. stock exchanges as long as the federal ban is in place. These companies are known as multistate operators or MSOs and many are listed on Canadian exchanges and over-the-counter (OTC). Some MSOs include (Canadian ticker/US OTC):