Federal law still regards cannabis as a Schedule I controlled substance, and neither major-party presidential candidate — U.S. President Donald Trump and former Vice President Joe Biden — supports legalizing it.
As a result, cannabis companies are unable to set up interstate supply chains, access commercial banking services or list on major exchanges, even if their operations are perfectly legal under state laws.
This has led to the rise of a unique type of publicly-traded cannabis company in the US: the multi-state operator, or MSO.
As their name suggests, MSOs operate in more than one state. They are not, however, interstate operators.
Despite these limits, the U.S. cannabis sector continues to balloon. Thiry-three states have passed a comprehensive medical legalization measure, while 11 states allow medical and recreational cannabis. That could change come Election Day, Nov. 3, when voters who live Mississippi, Arizona, Montana, New Jersey and South Dakota get to vote on legalization referendums.
“The U.S. is a very large market," says cannabis expert and Oxford Club strategist Matthew Carr. "I believe $80 billion by the end of the decade."
The global cannabis market will likely be $200 billion by then, he added.
Carr, who is also editor of the "Profit Trends" newsletter, spoke with Benzinga about how MSOs navigate this tricky market. He also highlighted how they compare to their Canada-based counterparts.
Comparing U.S. And Canadian Markets
Due to the federal prohibition on cannabis in the U.S., MSOs are unable to exploit or take advantage of supply chain management.
"And by that I mean, there’s no interstate commerce," Carr said. "Cannabis can’t travel across state lines. So, that means, every state an MSO operates in, they have to build this duplicative infrastructure for that state — grow ops, manufacturing, packaging, retail, etcetera.”
Canadian cannabis companies, such as Smith Falls, Canada-based Canopy Growth Corp. (NYSE:CGC), do not face these challenges.
“For Canadian licensed producers (LPs), like a Canopy, you can have a massive grow op — especially an indoor one in a province that has terrible weather but cheap real estate," Carr said. "And ship that, not only nationally, but internationally.”
However, U.S. MSOs have one significant advantage over Canadian LPs: access to the US market.
And there are several states that are larger than or comparable to the entire Canadian market. For instance, California is the single largest cannabis market in the world, as well as one of the world’s largest economies.
“So, investors need to keep in mind that Canadian LPs like Aurora (NYSE:ACB), Aphria (NASDAQ:APHA), Canopy, Cronos (NASDAQ:CRON), Hexo (NYSE:HEXO), Organigram (NASDAQ:OGI), Tilray (NASDAQ:TLRY) and others — those trade on major U.S. exchanges like the NYSE and Nasdaq, but they are not plays on the American market," Carr explained. "They are plays on the Canadian and international markets."
MSOs like Acreage (OTC:ACRHF), Curaleaf (OTCQX:CURLF), Cresco (OTCQX:CRLBF), Green Thumb (OTCQX:GTBIF) are prevented from trading on U.S. exchanges because of federal legalization — they trade over-the-counter (OTC) here — are plays on the American market.”
U.S. cannabis companies are also at a disadvantage because they don't have access to commercial banking services.
“Federal law currently defines all marijuana-related endeavors as criminal enterprises, including those commercial activities that are licensed and legally regulated under state laws," Carr said. "Therefore, almost no state-licensed cannabis businesses can legally obtain a bank account, process credit cards, or provide loans to small businesses and entrepreneurs."
Last September, the House of Representatives passed the Secure and Fair Enforcement Banking Act. This would provide cannabis companies access to the same financial instruments every single business in this country can tap.
But this has not moved forward in the Senate.
"It’s been essentially DOA because the Senate in its current form will never move that forward," Carr added. "The House has included SAFE Banking Act language in both of its COVID-19 relief packages. But that likely won’t progress.”
Initially, Carr was not optimistic about cannabis companies’ prospects in a global coronavirus pandemic. The industry was already facing the worst bear market in its history when the virus arrived in North America.
But the industry surprised him with its fortitude.
“What we saw was the resilience of these companies and their ability to adapt," he said. "They were deemed essential businesses and implemented delivery and curbside pickup. In turn, sales have flourished. In the U.S., we’re now looking at roughly $10 billion in adult-use sales this year with as much as another $7 billion in medical.”
Carr says the increase in sales may be due to a decrease in illegal activity.
“What I’ve heard from CEOs and industry participants is that COVID-19 disrupted the illicit market," he said. "This provided a massive opportunity for legal cannabis. They saw it in their sales; they saw it in their customer counts."
Tihs gave legal cannabis the ability to make some inroads into this illicit market overhang that’s been siphoning away revenue for years, he explained.
“So, in the U.S., you’ve seen shares of American MSOs double off those lows in March and some of these companies are setting new 52-week highs as they’re reported record sales, and records not just for that individual company, but for the entire cannabis industry," he said.
Canada’s legal cannabis industry, on the other hand, hasn’t fared as well during the pandemic. And Carr suspects that the illicit market played a role in that outcome as well.
“Canada hasn’t enjoyed the same success. A lot of shares are near 52-week lows," he said. "And we’ve heard, like from Aurora recently, that the illicit market is back in force in Canada, hurting revenue.”
Which MSOs Are Most Impressive?
“You can’t go wrong with Curaleaf," Carr said, likening it to Starbucks. "This is the largest MSO in the country and in the next quarter, the company is projected to report more than $200 million in revenue."
Florida-based Trulieve (OTCQX:TCNNF) is another one of his favorites.
"Instead of expanding rapidly to as many states as possible, Trulieve has focused on dominating one market at a time," he said. "And right now, it controls the Florida market."
He also likes Las Vegas-based Planet 13 (OTCQX:PLNHF), which he compared to Dave & Busters.
"The Superstore is my favorite dispensary in the country," he said. "It alone accounts for almost 10% of all cannabis sales in Nevada. Planet 13 is expanding that concept to more states."
Carr is optimistic about the polling for the Arizona, Montana, Mississippi, New Jersey and South Dakota referendums. All appear to be favored by at least 60% of voters in their respective states.
Mississippi’s drive for legalization, however, could run into problems due to a split vote between two referendums.
“The biggest issue is in Mississippi where Initiative 65 and Alternative 65A will appear alongside each other. Alternative 65A is more restrictive, for instance prohibiting patients from smoking whole-plant cannabis,” Carr explains.
“From an activist perspective, this is seen as an intentional effort by legislators to undermine the medical marijuana industry as well as confuse voters.”
When asked which state markets he’s most excited about, Carr points to the East Coast.
“You’d want the densely populated, more liberal East Coast markets," he said, citing New Jersey's and Pennsylvania's moving forward with a legislative measure for adult-use.
“Florida expanding into adult-use would be a massive boost as well," he said. "Florida is already a $1 billion market, same as Pennsylvania. New Jersey will be another $1 billion market.”