The haze is finally clearing for U.S. pot companies.
Since Democrats won control of the Senate earlier this month, many in the cannabis industry are betting on a more rapid path to full federal legalization and a pickup in deal making as companies rush to scale up. The Global Cannabis Stock Index, which tracks U.S.-listed marijuana stocks, has climbed 35% since the start of this year.
Today's high expectations look more justified than earlier speculative rallies that left pot investors badly burned. After almost doubling in value in 2017, the index was pummeled for two years as Canadian cannabis companies reported disappointing sales and profit numbers, and black-market dealers proved more resilient than expected.
This time, cannabis companies are performing well—particularly big U.S. growers with operations in multiple states. Pot sales have been strong during the pandemic as consumers have spent more time at home and received stimulus checks. In November, grower Cresco Labs reported its third consecutive quarter of revenue growth above 40%. Pot stores also won market share from illegal dealers by letting consumers order online and offering curbside pickup.
Progress on this score remains slow: An estimated 78% of U.S. sales still happened in the black market in 2020, according to the cannabis-focused SOJE Fund. States' thirst for new sources of tax revenue amid the pandemic provides an extra incentive to increase the size of the legal sector. November ballots in Arizona, Montana, South Dakota and New Jersey all approved the legalization of adult use. New York is now weighing a similar move to plug a projected $15 billion budget hole in the current and coming fiscal years.
Expectations of the Biden administration have already helped cannabis companies strengthen their finances. Low valuations have made raising equity highly dilutive for much of the past 18 months. Responding to the jump in their share prices after the Senate flip, cannabis companies tapped the market for $500 million in the second week of January alone, according to Viridian Capital Advisors, more than they raised in the entire fourth quarter last year.
Debt markets are already offering better terms as competition to lend to pot companies increases. U.S. cannabis grower Curaleaf recently got a credit facility with a 10.25% coupon. That is expensive by most industry standards, but two years ago pot companies paid rates closer to 15%, and often had to throw in additional sweeteners such as warrants.
Investors still need to guard against excessive optimism. The Democrats' slim majority means that full cannabis reform could still be a way off under current Senate rules. One piece of proposed legislation, the MORE Act, would decriminalize cannabis. For now, it probably doesn't have the cross-party support it needs to pass the 60-vote majority hurdle.
The Safe Banking Act, which would give cannabis companies access to normal banking services, may have their best shot in the near term. "It is the most teed up and has the best bipartisan support... Full legalization will likely take a little longer," says Michael Correia, director of government relations at the National Cannabis Industry Association . There is also the possibility that cannabis reform slips down the agenda, given pandemic-related priorities such as protecting jobs and rolling out the Covid-19 vaccine.
Investors shouldn't overestimate the likely pace or extent of reform, but the U.S. pot party is at least getting started.
Write to Carol Ryan at carol.ryan@wsj.com
Cannabis Companies Are Ready to Roll
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