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Georgia Senate vote lights up cannabis stocks

Democrat control of Congress lifts shares on hopes of quick federal legalization.

The coming year could be a good one for the cannabis industry. If so, we can thank voters in Georgia, who last week voted in two Democrats to the U.S. Senate.

While that news has been overtaken, the result is important. The run-off election gave control of both houses to the Democrats, which increases the chances of a federal law legalizing cannabis this year. 

The cannabis industry ended 2020 on a high as key players showed financial strength and several turned a profitability corner. A big energizer was the Nov. 3 election of Joe Biden which raised hopes for legalization. In December, the House of Representatives passed the Marijuana Opportunity Reinvestment and Expungement (MORE) Act which legalizes cannabis and it now awaits Senate approval.

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The vote passed by a 60% majority which indicates broad support crossing party lines.

Why all the excitement? The U.S. is the largest single potential market for cannabis products. Legal cannabis is not about moving an aging hippy from a dealer to a legal store. It’s about medicinal marijuana for pain and anxiety management, as well as consumer products from gummies and cookies, to cannabis-infused drinks.

Between election day and the time of writing an index of 43 of the largest publicly traded North American cannabis stocks are 67% higher as investors see that promise.

Here’s an update on an ETF that is positioned for U.S. growth.

Horizons US Marijuana Index ETF (NE: HMUS)   Closed Wed. Jan. 13 at $29.98.

Background: This fund was launched in April 2019 and provides exposure to the U.S. cannabis industry. The holdings are mainly American companies listed in Canada. They cannot get listings in the U.S. without a federal law but can get listings on the TSX and the NEO Exchange in Canada.  

This ETF is Canadian dollar-hedged and has C$32.1 million in assets. The assets are up 37% since early November.

Performance: This ETF was up 42.9% in 2020 with most of the gain after the U.S. election. The momentum has continued in the New Year.

Holdings: There are 30 companies in the fund, of which the top four account for about 40% of the assets. Only one is profitable, although all show strong revenue growth.

The largest holding is Columbia Care Inc. (11.4%), one of the original American medical cannabis producers. It has licenses in 18 U.S. jurisdictions and the European Union and stands to benefit from the five states which recently voted to legalize. It had revenue of US$126 million in its latest 12-month period and a loss of US$80.9 million. The shares more than doubled in 2020.

Green Thumb Industries Inc. (9.74%), based in Chicago, produces and sells medicinal and recreational cannabis in 12 states where it operates nearly 50 cannabis stores. It reported a 31% increase in revenue to US $157.1 million in its latest quarter and turned a profit of US $9.6 million, its first. Its shares more than doubled in 2020.

Cresco Labs Inc. (9.3%) is also based in Chicago. It has 15 production facilities and operates in nine states. It owns 19 dispensaries for medical marijuana and sells a variety of consumer products including gels, fruit chews, chocolates, vape pens, and popcorn. It has a market capitalization of C$1.9 billion, sales of US$335.3 million in its latest 12 months, and recorded a loss $US61.7 million.  Third quarter revenues rose 353%.

Curaleaf Holdings Inc. (9.27%) is based in the Boston area. It operates 93 dispensaries in 23 states and is one of the largest multistate cannabis operators in the U.S. It has a market capitalization of C$6.3 billion, trailing 12-month sales of US$238 million, and a loss of US$46 million.

Key metrics: The fund is rebalanced quarterly and has a management fee of 0.85%.

New industries take time to mature and their expansion usually moves in waves. The tempo is often three steps forward and one step back, so gains may be swift, followed by pullbacks.

That makes them volatile, but for patient investors they offer long term gains. 

(This is an edited version of article that appeared in the Internet Wealth Builder on January 11, 2021.)

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