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3 energizers driving cannabis stocks in 2021

New industries take time to mature. That's why 2021 could be a good year for cannabis stocks.

Cannabis industry stocks are ending the year on a high as key players show financial strength and the election of Joe Biden in the U.S raises  hopes for American federal legalization.

The news Wednesday that Aphria Inc. and Tilray Inc. will merge creating the largest cannabis producer by sales is another sign that the industry has its eyes on the fast-growing U.S. market.

Since election day on Nov. 3 an index of 43 of the largest publicly traded cannabis stocks is up 28.9% as investors bet the legislation isn’t far away. The biggest players by market capitalization – Green Thumb Industries Inc.,  Truelieve Cannabis Corp. and Cronos Inc., are all trading near their 52-week highs.

Energizer #1: Growing Profits

Green Thumb (CSE:GTII), which operates in 12 states, reported a 31% increase in revenue to $157.1 million in its latest quarter and turned a profit of $9.6 million, its first. Its shares are up 117% year to date.

Trulieve (CN-TRUL), the dominant Florida-based medical cannabis player, saw a record third quarter with revenue of US $136.3 million, up 93% year-over-year and net income of US $17.4 million. It was its 11th consecutive quarter of profitability. Trulieve’s shares are up 152% year to date.

Cronos Group Inc. (TSX: CRON) posted a better-than-expected third quarter with revenue growth of 24% from the previous quarter. Earnings were 96% higher though off a very small base.  It’s shares are up 4% year-to-date.

The rebound comes after a dismal two-year stretch following Canadian legalization in September 2018. The hype leading up legalization gave way to hangover, as the reality of too many companies chasing too little revenue set in. It triggered a stock price collapse with shares falling between 66 per cent 90 per cent thereafter.

Energizer #2:  A Joe Biden presidency

The Biden campaign promised to legalize cannabis at the federal level and the Marijuana Opportunity Reinvestment and Expungement (MORE) Act legislation was moved up the list for a congressional vote. The vote took place Dec. 4 and was approved by a 60 per cent majority.

The legislation would expunge prior marijuana convictions; apply a federal tax on marijuana sales; help fund small marijuana businesses; and allocate revenue to communities most affected by previous drug enforcement laws. It would also reduce taxes for producers.

The final hurdle is approval in the Senate before it becomes law. It may not come soon, but momentum is on the industry’s side.

Energizer #3:  Public opinion

Public approval for legalization crosses party lines. Five more states voted to legalize in referenda as part of their Nov. 3 ballots. A sixth state, Mississippi voted to allow medical marijuana, bringing to 36 states, the number which allow distribution of medical cannabis.

Two of the states – Montana, South Dakota – were carried by Donald Trump indicating popular support crosses party lines. The referenda wins mean that about 70 per cent of Americans live in states that permit recreational or medical marijuana. 

The Canadian industry has its eye on the U.S. which is the single biggest global market for cannabis-related products. For example, Cronos, which is 45% owned by U.S. tobacco giant Altria Inc., is sitting on $1.2 billion earmarked for U.S. investment.

For now, U.S. companies can only operate within the states for which they have licenses. So they must have 15 separate sets of operations. A federal law changes that.

It would also enable companies to have a primary listing on the New York Stock Exchange or Nasdaq giving them access to capital by large institutions.

They cannot list in New York now because it is illegal without a federal law.

Companies like Cronos, Canopy Growth (TSX: WEED) and Aphria Inc.(TSX: APHA) have primary listings in Canada and operate in Canada and elsewhere, but not in the U.S.

Companies like Trulieve have U.S. operations, but cannot list in New York or the TSX, because the TSX decided to follow New York’s lead. They trade here on the Canadian Securities and NEO exchanges.

New industries, like new technologies, take time to mature and progress in waves. Optimism in the beginning leads to a boom, often with speculative excess, followed by a bust. The industry regroups, consolidates and the next leg up begins. That could be the cannabis story in 2021.

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