Welcome to the New Era of Cannabis

Monday, March 1, 2021

Editor’s note: To kick the week off here at Empire Financial Daily, we’re sharing a special series of essays from our friend Tom Carroll over at our sister company Stansberry Research.

Previously, Tom worked at investment banks Legg Mason and Stifel for nearly two decades, where his research was used by CNBC, Bloomberg, CNN, and Fox Business. His resumé is adorned with industry stock-picking awards from the Wall Street Journal and Forbes.

These days, Tom writes the excellent Cannabis Capitalist newsletter. And as he’ll explain over the next few days, he believes several catalysts are in place for cannabis stocks to absolutely take off from here – creating one of the biggest investment opportunities in the years ahead…

Our nation’s recent election – controversial as it was – has aligned federal lawmakers with their state and entrepreneurial counterparts…

Cannabis is a commodity that’s about to disrupt hundreds of billions of dollars in sales across multiple sectors. Investment opportunities should exponentially expand with less risk.

The industry is moving into a new era that will provide transformative benefits to consumers.

Right now is the perfect time to refresh our thinking about the cannabis industry. It’s early in the new year, and the cannabis stars have finally aligned. Let’s review and reinforce our understanding and investment views of this massive new market…

There have been four distinct eras of cannabis investment and growth. This is how we see legal cannabis evolving throughout the past 25 years.

Grassroots Business Development (1996 to 2010)

It all started in 1996, when California created the first medical-cannabis program in the country. Two years later, Alaska, Oregon, and Washington joined this new market. Early investors and entrepreneurs took big risks both financially and legally to get started. They faced challenges ranging from fear of federal raids to operating a cash-only business to a “not in my neighborhood” mentality that limited locations.

From ‘Toehold’ to ‘Foothold’ (2010 to 2018)

As legal cannabis programs expanded across the U.S., professional investors and sophisticated entrepreneurs took note of the massive opportunity emerging. Investment bankers quit their high-paying jobs to form start-ups, or to “wrap up” growing private businesses. Former pharma executives came out of retirement. Cannabis-focused private equity companies formed. This is when the current big U.S. cannabis companies got their start.

Toward the end of this time period, we started to see corporations make big, strategic moves. Alcoholic beverage giant Constellation Brands (STZ) – maker of drinks like Corona and Svedka – put $4 billion into Canopy Growth (CGC). Cigarette maker Altria (MO) invested $2.4 billion in Cronos (CRON). Molson Coors Beverage (TAP) completed a deal with HEXO (HEXO) to develop THC beverages.

A New, Investable Market Takes Shape (2018 to 2020)

With the national legalization of cannabis in Canada, U.S. cannabis companies went public through “reverse takeovers” of already publicly traded Canadian companies. This gave them a new currency to fund future growth.

Soon, individual investors went from merely dabbling to outright trading in cannabis stocks. Cannabis-focused hedge funds were formed. Foreign subsidiaries of investment banks hired equity research analysts and bankers to cover the explosion in the number of cannabis stocks. Exchange-traded funds (“ETFs”) launched that focused on cannabis. Canopy Growth and Tilray (TLRY) became household names on CNBC.

Cannabis was here to stay. Which brings us to…

The Full Monty (2021)

The industry has kicked into high gear, and it’s about to see real, risk-adjusted returns. In November 2020, Joe Biden and Kamala Harris won the election. And just days into 2021, the Georgia Senate runoff election pushed the Senate blue, giving Democrats 51 potential votes. These elections gave the U.S. a best-case policy outcome for cannabis. Everything that has been built and established up to this point will now begin to see real, supportive, and rational federal regulatory support for this inevitable new market. It will not be easy, but the balance of power has shifted.

Today, there are several publicly traded U.S. cannabis companies with professional C-suites, strong balance sheets, hundreds of millions of dollars in revenue, and growing brand recognition. This year, we will see the first cannabis company meet and exceed $1 billion in total sales.

We now have a White House and Congress that will incrementally move toward full legalization. Three bills will help support this… The Secure and Fair Enforcement (“SAFE”) Banking Act, the Strengthening the Tenth Amendment Through Entrusting States Act, and the comprehensive Marijuana Opportunity, Reinvestment, and Expungement (“MORE”) Act, which fully legalizes cannabis and contains strong social-justice measures. Each of these incremental moves represent major catalysts for cannabis. And each step will be accretive to the companies in the sector.

I expect the SAFE Banking Act will pass first. As future legislation comes down the pike, the next big step will be getting U.S. companies listed on U.S. exchanges.

But the most important part is investors have not missed out. Now is truly a great time to look at this new sector.

Before we go further, let’s look more specifically at the milestones that got us to this point. Each is important to understand before making sizeable investments in cannabis.

Right now, we’re seeing telltale signs that cannabis is the biggest new market of our generation…

In 2018, the cannabis industry achieved a number of key milestones. These items, which were percolating for a number of years, illustrated a tipping point for the emerging cannabis industry. Five defining events occurred for the cannabis sector in 2018 and set the stage for the following two years.

  • First, Canada legalized cannabis for adult use nationwide.
  • Then, the Farm Bill in the U.S. was signed into law, legalizing the hemp industry nationwide.
  • Third, the U.S. Food and Drug Administration (“FDA”) approved Epidiolex, a cannabinoid, for use in people with two forms of rare epilepsy.
  • Then, five cannabis companies listed their shares for trading on major U.S. exchanges: two on the Nasdaq and three on the New York Stock Exchange.
  • And finally, adult-use cannabis sales exceeded medicinal cannabis sales for the first time.

These milestones and other characteristics of this new, disruptive market launched cannabis stocks higher at the beginning of 2019. The North American Marijuana Index (“NAMMAR”), an index of cannabis-related stocks operating across North America, rose 55% in the first three months of last year. This far outperformed the broader S&P 500 Index, which gained 13% during the same time period.

Some stocks soared even higher… For example, Aphria (APHA) rose 91%. Cronos soared 124%. OrganiGram (OGI) was up 134%. Even Canopy Growth gained 61% in a performance that didn’t hint at any of its troubles to come.

However, that was about it for most cannabis stocks in 2019. Individual investors – the predominant shareholders – took strong first-quarter returns to the bank. Shortly thereafter, the cannabis market crashed.

The Canadian market started to see growing pains, including fear of oversupply and massive distribution bottlenecks.

These challenges translated into revenue misses and a lack of profitability among the Canadian operators. And since these companies are traded on U.S. exchanges, they receive a lot of attention in the financial press. The bad news was broadcast far and wide. These stocks, as well as the U.S. operators, took a pounding from May to December of 2019.

Despite cannabis stocks underperforming, 2019 still saw its own set of incredible milestones for the industry…

These added to the prior year’s achievements and reinforced our view that cannabis as an industry was gaining steam, not losing it. In summary…

  • The SAFE Banking Act passed the House of Representatives in a landslide vote.
  • The MORE Act moved out of committee and headed to the House floor.
  • The Federal Reserve said that hemp businesses can have full access to the U.S. banking system, just like other businesses.
  • The FDA held its first national meeting on CBD and began formal policymaking.
  • Colorado hit $1 billion in cannabis tax revenues.

These important milestones can’t be undone… They move the ball forward for the sector. Both 2018 and 2019 further set the stage for continued cannabis progress across the board. 2020 was going to be the best year we’ve seen in cannabis so far.

As I said last year for my 2020 annual outlook…

So here we are in 2020, with cannabis stocks 28% lower than they were a year ago, but with much more visibility into operations and the regulatory world. We wouldn’t be surprised to see big returns in cannabis stocks this year, given current price levels and improving 2020 operations.

This is more or less how the sector played out in 2020. Of course, what we did not anticipate was the global punch in the face that was about to hit. The COVID-19 virus spread rapidly around the world, wreaking havoc from shore to shore, industry to industry. But with most sectors, businesses adapted quickly. While terrible, the global pandemic was a giant wake-up call for many. It forced businesses to make themselves more flexible and efficient.

Despite the global disruption from the pandemic, cannabis companies dug in and continued to grow their businesses…

Here are some 2020 milestones:

  • Cannabis businesses were deemed “essential” in the pandemic, allowing cultivators, processers, and retail dispensaries to remain open for business. Regulators in legal cannabis states viewed them as being similar to pharmacies, showing government leaders are supporting cannabis. 
  • Cannabis sales grew through the pandemic. While restaurants, bars, hotels, airlines, and others saw sales decline, cannabis companies continued to report record sales.
  • Institutional investors began to place big bets. With stocks at multiyear lows from the sell-off in 2019, plus the damage inflicted by COVID-19, professional money began to sniff at cannabis.
  • Vermont approved adult-use cannabis. In October 2020, Vermont became the most recent state to permit adult-use of cannabis products. Importantly, it made this change through the state legislature, meaning lawmakers crafted the program and produced its provisions, and a residential vote wasn’t required.
  • November Green Sweep saw Biden and Harris win the election, while five more states (Arizona, Montana, New Jersey, Mississippi, and South Dakota) approved legal cannabis, bringing the total to 41 out of 51 jurisdictions (including the District of Columbia) with legal cannabis programs.
  • New Senate Support for the White House following the Georgia Senate runoff election pushed the Senate blue giving democrats 51 potential votes. These elections gave the U.S. a best-case policy outcome for cannabis. Everything that has been built and established up to this point will now begin to see real and rational federal regulatory support of this inevitable new market.
  • International Loosening. In December, the United Nations reclassified cannabis as a drug not nearly as dangerous as once thought. This is synonymous with the Federal Government de-scheduling cannabis in the U.S. and moving it down the list of controlled substances.
  • The MORE Act passed the House. In another big regulatory hurdle, December saw the passage of the Marijuana Opportunity, Reinvestment, and Expungement Act in the House of Representatives.

Despite 2020 going down as one of the most challenging years in history, the cannabis markets continued to evolve and reach new and greater milestones.

This is all great. But what’s next? What themes or milestones can investors expect in the coming year? The prior years have set things up very well, and we expect even more. In tomorrow’s essay, I’ll explain what lies ahead for 2021.

This new era of cannabis is poised to be a massive movement…

That’s why, on Thursday at 8 p.m. Eastern time, my friend Whitney Tilson and I are hosting the 2021 Empire Cannabis Summit, where we’ll discuss the massive tailwinds in the sector. This situation is poised to create a $130 billion investment opportunity – a “perfect storm” for cannabis stocks.

During the event, I’ll even share the name and ticker of our favorite stock to take advantage of this opportunity. The event is completely free to attend, but you must register in advance… you can do so right here.

In the mailbag, I’m (Berna) circling back to letters I received in response to last month’s essay on changing sleep, exercise, and drinking habits during the pandemic

Cannabis is one area that I didn’t cover in that piece on wellness, coping, and recreation… but I did mention in the January 14 Empire Financial Daily that its usage has soared during the pandemic.

If you’re one of the many Americans who has increasingly turned to cannabis during the last year… did you use it to help you sleep or de-stress, for other medical reasons, or instead for recreational use, perhaps as an alcohol substitute? Let me know in an e-mail to [email protected]. I’m happy to keep responses confidential if you prefer (please indicate if that’s your preference).

“As per your request here is a brief outline of my lifestyle changes since the pandemic started. First off, I am a 67-year-old male in excellent physical condition. Over the past year, I have increased both the number and intensity of my workouts. Sleep duration has not changed appreciably, averaging 6-8 hours per night. Alcohol consumption has gone down markedly as opportunities for social interaction where alcohol is involved have diminished. Overall physical health has improved, mental health has been challenged due to repeated lockdowns in the Province of Ontario.” – Bruce L.

“Hello Berna, I am a Lifetime subscriber since last year. I can’t remember how I dabbled onto Empire Financial, but I am glad I did, as it gives me perspective on what is actually happening in the U.S. given that I am a newbie in the U.S. market. Being in Asia, we often hear distorted or edited news to groom our perceptions, lest we have many close associates in the U.S. Unfortunately, I didn’t fall into that category. But reading your content truly broadened up my mind on what is happening in the U.S. and sometimes across the Europe. From a feeling of unfamiliarity and strangeness, I find myself getting to know a little bit of America through your newsletters. So thank you for bringing me out of my well so to speak.

“My country is going through another round of lockdowns given the rise of COVID-19 positive cases. But it feels more scary, our government is also given more ease to the economic sector to help people survive. It is really up to the civic consciousness of our people to ride this through whether or not our government imposes restrictions. Personally and selfishly, I do enjoy this time. The restrictions give me approval not to travel out and to do things at my own pace. And with that, I have time to catch up on my reading, go to sleep at ungodly hours, and wake up late to make up for it. And yes, I find myself drinking more. It has now become more common for people in my country to drink every night before their sleep. I think it is actually to help them sleep despite the secret anxiety and stress they are experiencing from boredom. While many others have picked up exercising, I am unfortunately still slacking in this department. Honestly, I rather be reading your newsletters!! But I know, I know… life is a balance.

“I have to admit that I don’t understand all the contents of your articles, but the consistency of a subject helps me gain bits and pieces of a bigger picture. So thanks Berna for your words. Stay well!” – G.

Berna comment: Thank you for your kind words, G. It makes me happy to know that my work and that of my colleagues is helping to make the world a bit of a smaller place and bridge the miles that separate us.

“Two facts of interest related to your note:

“1) The tax on beer and wine in US has been raised ONCE since 1954 and that was in 1993. Spirits only a little more.

“2) Average American has sleep deficit of 72 hours. How do we know? Take research subjects and isolate them for a month and give them nothing to do. They sleep 12hs/day in the first week, then 11, then 10, then 9 as weeks progress. The body is so smart.” – S.

Berna comment: Your first point is interesting, S. There was a big wine tariff that was put in place last year – I think it was 25% – affecting the pricing of wines imported from the EU. There has been much chagrin over that.

I’m not familiar with all the taxation history of the industry, but I do know that on the state level, there are often proposals popping up about increases – usually to fund state-run health programs or something similar. Oregon could be currently facing its first possible state tax increase on beer and wine in decades.

Historically, I’m not sure these changes have led to a huge difference in consumption… although that EU wine tariff might have from a few things I read, given there are substitute wines not subject to that tax.


Tom Carroll
with Berna Barshay
March 1, 2021

Whitney Tilson
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About Whitney Tilson

Prior to creating Empire Financial Research, Whitney Tilson founded and ran Kase Capital Management, which managed three value-oriented hedge funds and two mutual funds. Starting out of his bedroom with only $1 million, Tilson grew assets under management to nearly $200 million.

Tilson graduated magna cum laude from Harvard College with a bachelor’s degree in government in 1989. After college, he helped Wendy Kopp launch Teach for America and then spent two years as a consultant at the Boston Consulting Group. He earned his MBA from Harvard Business School in 1994, where he graduated in the top 5% of his class and was named a Baker Scholar.

Click here for the full bio.