[Todd Harrison is the CIO and co-founder of CB1 Capital and a columnist for Investopedia. The views expressed herein are those of the author and do not necessarily reflect the views of Investopedia.]

After bouncing off all-time lows in March, global cannabis stocks paused to reflect as the traditionally treacherous summer season commenced. The Bloomberg Global Cannabis Index lost 9.5% in June and arrived at the 2020 midpoint down 29% YTD. It remains our view that the back-half of this year will be catalyst-rich and while many variables remain, the stage is seemingly set.

In our last column, we walked through a multitude of dynamics, including how COVID-19 and the social justice movement crystallized the need for a legal and regulated U.S. cannabis market; how more and more States are turning to cannabis for tax revenues and job growth; the implications of the upcoming election; the potential for banking reform; and the December UN meeting.

Looking forward, several forces will drive the sector through the remainder of 2020:

The November Election

In early July, Joe Biden’s campaign released their cannabis policy blueprint , which includes his plans to reschedule adult use, de-schedule medical and decriminalize both. Importantly, it would leave the issue of legalization to individual states, many of which have existing infrastructures for turn-key growth. The Senate race is of particular importance as that’s been the bottleneck for the bulls the last few years.

State Referendums 

Bloomberg Intelligence recently published an article, “New Jersey Legalization May Ignite Northeast Buzz,” which echoes many of our core assumptions. “If New Jersey voters approve adult-use marijuana in November,” they wrote, “it could in short order create one of the nation’s largest legal pot markets and potentially unleash a five-state Northeast bloc worth over $7 billion a year in sales.” They further estimate total U.S. cannabis sales could surge 50% in 2020 despite the disruptions caused by COVID-19.

Investopedia 2020
Investopedia 2020.

Regulatory Arbitrages

Cannabis companies can’t bank commercially, or access capital given the current regulatory landscape but legislation has already been passed by the U.S House of Representatives that could change all that; and if SAFE Banking provisions are included in other pending legislation, such as the Bank Secrecy Act-Anti-Money Laundering (BSA/AML) bill that is expected to pass prior to the election, it would be an immediate game-changer that lowers the cost of capital and fast-tracks mainstream adoption.

Who are the Winners?

With the Northeast dominoes set-up for the Fall and Arizona voters poised to pass adult-use out West, several U.S. operators are expected to benefit in kind, including Curaleaf Holdings, Green Thumb Industries, Cresco Partners, Trulieve Cannabis, and Terrascend Corp, which owns more than 20% of the Pennsylvania wholesale market and has a New Jersey footprint, as well.

YCharts
YCharts.

Where We are in the Cycle

To appreciate where we are, we must understand how we got here. In the interest of time, I’ll skip past the 30,000 years when an array of cultures benefitted from the vast wellness properties of this amazing plant, and I’ll breeze through the prohibition when the U.S. government weaponized “marijuana” as an immigration tool and for their War on Drugs. 

The industrial evolution of cannabis, which is pertinent to this discussion and far more relevant to our financial futures, has three distinct phases: 

Cannabis 1.0: Canadian cultivation enjoyed spectacular gains in 2016 and 2017 before that bubble burst, leading to a 92% decline in global cannabis stocks from January 2018 until March of this year. Canadian LPs remain mired in over-capacity and stymied by a slower-than-expected international roll-out, but we see select opportunities up north, including low-cost producer Village Farms.

Cannabis 2.0: U.S.-led consumer packaged-goods (CPG) that use cannabinoids as ingredients will drive the next leg of this secular bull market. We are at the nascent stage of this phase as consumers educate themselves on the novel end-products and various form factors, including beverages, nutraceuticals, cosmetics & vanity, and pet supplements, as well as the industrial use cases.

Cannabis 3.0: Efficacy-driven solutions will solve medical riddles across a wide range of indications and ailments and finally shift the popular perception of cannabis from a gateway drug to a wellness solution; one with a treasure trove of active pharmaceutical ingredients (API). This will follow a biotech pathway, where clinical successes drive medical adoption; GW Pharmaceuticals (GWPH) is the leader here.

We can juxtapose these buckets against the three phases of any market move: denial, migration, and panic. The sheer carnage of 1.0 and the exodus that followed has most industry followers in denial that a recovery, much less a new bull market, is possible. Banking reform will, in our view, trigger migration to the space as institutional investors chase organic growth; and demonstrated efficacious agility should, over time, turn late-cycle adopters into panic buyers of the wellness thesis.

That is the future we foresee. Until the plumbing is fixed, however—until legislation allows pension funds and other institutions to invest in this domestic secular growth story—U.S. cannabis companies will remain listed on the Canadian Stock Exchange, privy to a handful of hedge funds and abused by an army of retail stock jockeys. We expect that to change; and we look forward to when it does.

(Todd Harrison and his firm may hold positions in the stocks mentioned.)