This was a very big week for the U.S. cannabis sector, which has become significantly more appealing to investors. After the poor reception to the debut by MedMen on the CSE in late May, it was encouraging to see Green Thumb Industries (GTI) embraced by the market, with the stock, which trades as GTII on the CSE, opening well above its go-public deal at C$7.75 and ending the week at almost 25% higher. While GTI reported Q1 sales 51% higher than those of MedMen ($10.93 million) with a dramatically lower operating loss, the market cap was substantially lower at C$7.75 than that of MedMen at C$5.25. At the closing prices of C$9.68 for GTI and C$4.69 for MedMen, the two sport market caps of US$1.03 billion and US$1.65 billion, respectively, based on fully-diluted shares.
The stock of iAnthus Capital posted very strong performance last week, surging to an all-time high of C$7.55 the morning that GTI began trading and ending the week more than 16% higher even after pulling back sharply. The valuations the market is awarding these new issues is generating some interest among investors in the broader space, including not only iAnthus but also others, like CannaRoyalty, Liberty Health Sciences, MPX Bioceutical and TerraTech. Expect more cannabis operators to go public over the balance of the year, most of which will be through listing on the CSE in Canada.
U.S. operators trade at a big valuation discount to their counterparts in Canada, though trying to figure out the right discount is a challenge. Investors must weigh many factors that make U.S. companies less attractive against some favorable ones. Canadian licensed producers (LPs) don't have to deal with the onerous taxation under 280E, and they are free to pursue global opportunities.
Perhaps most importantly, they don't have to worry about imprisonment or asset confiscation. On the other hand, U.S. companies have the opportunity to gain share in a much larger market, and one that doesn't have a monopoly provincial customer, as is the case in most of Canada. Additionally, the product set in the U.S. is more favorable than the currently permissible formats in Canada.
The success of investments in U.S. multi-state operators will come at the expense of Canadian operators. While some Canadians and some U.S. investors who have been in the Canadian LP sector may reallocate, the bigger driver will most likely be a broadening of the investor base. Finally seeing the creation of larger investment funds targeting the industry, making it easier for a bigger pool of investors to participate, especially in private companies. With Massachusetts set to begin opening the doors for adult consumer access next month, more states beginning or expanding their medical programs and a large Midwestern state, Michigan, likely to legalize by ballot initiative later this year, expect to see increased interest in the U.S. direct cannabis sector.
The future success of the U.S. cannabis sector is obviously tied to the continued progress in rationalizing the federal regulatory environment, and we remain hopeful that Congress will be addressing some urgent reforms, particularly surrounding banking. The STATES Act introduced by Senators Elizabeth Warren and Cory Gardner earlier this month currently has only an 8% chance of passage, according to Skopos Labs, but this is significantly higher than the CARERS Act had when introduced in 2015.
That as long as status quo prevails, the U.S. cannabis industry can flourish, and the November midterm elections could provide even more conviction that federal enforcement of the Controlled Substances Act will not be a threat, especially if the Democrats can regain the House of Representatives. So, while there is inherent risk to the long thesis for the U.S. cannabis sector, these risks are likely factored in by investors. | | |