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May 21, 2021

Theme Recalibration: LONG US Cannabis

MRP added LONG Cannabis to our list of themes on January 8, 2021 due to the potential for the American cannabis market being blown wide open by Democrat Joe Biden’s victory in the 2020 US Presidential election. In addition, Democratic victories in Senate and House races gave the party a slight edge in both chambers of Congress. During his campaign, Biden told supporters that he would use his executive office to “decriminalize the use of cannabis and automatically expunge all prior cannabis use convictions” if elected.

Though that is a less aggressive stance than some of his opponents in the Democratic primary had taken, it would undoubtedly receive support among the party, representing a huge step forward for the American cannabis industry - one that would put the US on an irreversible trajectory toward eventual legalization across the nation.

While progress on rolling back the federal marijuana prohibition has been slower than expected, legislation is in the congressional pipeline and has garnered more bipartisan support than ever before. For example, the Secure And Fair Enforcement Banking Act (SAFE) passed the US House of Representatives just last month.

MRP has followed the development of this banking reform bill since its initial introduction back in 2019, noting that SAFE would allow banks to legally handle the proceeds from a state-legal cannabis business by prohibiting certain federal banking regulators from taking adverse actions against banks and credit unions that provide services to “cannabis-related legitimate businesses”. The inability of cannabis firms to access federally-chartered banking institutions is the biggest roadblock the industry currently faces. In particular, the Act would direct the Financial Institutions Examination Council and federal banking regulators to develop additional guidance for banks and credit unions, as well as relax requirements on financial institutions to file Suspicious Activity Reports (“SARs”) for transactions with cannabis-related legitimate businesses.

The current bill, now referred to as SAFE 2.0, carries a significant amount of bipartisan support, having passed the House by a final recorded vote of 321-101 in April. That included 106 Republicans (exactly half of the 212 Republicans in the chamber) voting for approval. SAFE’s re-introduction in the Senate on March 23 came by way of Senators Jeff Merkley (D-OR) and Steve Daines (R-MT), along with six of 29 additional co-sponsors being Republicans. This has coincided with more deeply conserative states like Alabama and Missouri easing restrictions on medicinal sales of marijuana.

As it stands, the Cannabis space is dominated by Canadian giants like Aphria and Canopy Growth Corp. However, as Boris Jordan, executive chairman of leading US cannabis firm Curaleaf, has noted: “Every country that’s legalized cannabis ring-fences their industry from outside competition”. Some of the Canadian stocks even took a hit in the immediate aftermath of the US Presidential election as traders weighed whether or not they’d be able to compete with rising competitors in the domestic US market.

Though Canadian companies cannot yet import their products directly into the US, they remain optimistic that they will be able to gain an eventual foothold by utilizing the same creative M&A strategies that helped them infiltrate other international markets, generating healthy growth in Europe, as well as Australia and Latin America.

Even if the Canadians manage to offset import restrictions in the American market, they're going to face stiff competition for domestic multi-state operators (MSOs) who've expanded their business across the patchwork of varying legal statuses in the 36 states that have opened up to recreational and/or medical cannabis.

As MRP noted earlier this month, the aforementioned Curaleaf is seen as having massive potential. In their most recent earnings report – released on Monday – Curaleaf reported first-quarter losses of $17.2 million, or EPS of -$0.03, identical to the year ago period. However, sales exploded to $260.3 million from just $96.5 million a year ago. As MarketWatch notes, retail and wholesale cannabis revenue each more than tripled, while management fees plunged. The company now operates more than 100 retail pot stores across the US, including four in Illinois and Pennsylvania that have opened since the end of the quarter, and is approaching 2,000 wholesale partner accounts, according to disclosures made Monday.

Elsewhere in the burgeoning US industry, MSO Trulieve Cannabis said Monday that it plans to acquire Harvest Health & Recreation in a $2.1 billion all-stock deal. Per Barron’s, the combination of Trulieve and Harvest would be one of the largest cannabis companies in the world, in terms of sales. Consensus estimates for combined 2021 adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $461 million would make the combined entity the most profitable venture in the industry.

Both Curaleaf and Trulieve are among the “big four” US multi-state operators, joined by Green Thumb Industries Inc. and Cresco Labs Inc.


In light of the activity in the US, MRP has decided to recalibrate our LONG Cannabis theme by focusing in on the US MSOs, which may have much greater potential to dominate their domestic market when its full potential is realized. Going forward, we will track this theme with the AdvisorShares Pure US Cannabis ETF (MSOS) instead of the ETFMG Alternative Harvest ETF (MJ) we have used to track it thus far.

Since we added the theme, the MJ returned 19%, more than doubling the S&P 500's gain of 9% over the same period.