Cannabis Industry Chart Of The Week: Has The Market Rationally Priced The Prospects For Federal Legalization?

Cannabis stocks closed down nearly 9% this week, according to the Alternative Harvest ETF. The market clearly viewed the Schumer/Booker proposal as little more than political posturing having virtually no chance of being passed. But one might wonder, why such a violent reaction?  After all, did anyone seriously expect that true federal legalization was at hand?

• Our thoughts:

  • Many cannabis proponents would prefer an approach that simply deschedules cannabis (thereby promoting financial access) and removes IRS 280e, and leaves most of the rest up to the states. This position was eloquently expressed by Kyle Kazen CEO of Glass House Brands: “Let’s get the hell out of the way and let the states do it… the federal government has only done harm here…”

  • Perhaps most significant in driving market reaction is the apparent intransigence of the proposal’s authors. Cory Booker (D_NJ) said he “will lay myself down” to block the passage of less comprehensive reform bills (such as SAFE Act, or MORE Act). Booker’s stance seems to indefinitely delay these more moderate measures while consensus on social equity, states rights, and sentencing reform is achieved.

  • Finally, the proposal at least tangentially raises the specter of interstate commerce, and states with newly established adult use frameworks will fight hard to prevent these tax revenues from moving to lower cost/better agricultural locations.

• The market has been rationally pricing the dwindling likelihood of federal legalization. The graph shows the prices of a basket of four groups of cannabis stocks indexed to 4/2/21: Small Canadian (Blue), Large Canadian (Orange), Small US, (Grey), and Large US (Orange).

  • Large Canadians are the worst performing group as would be expected since they stand the most to gain by US federal legalization.

  • Large US is best performing group, and this makes sense because this group is performing quite well under the status quo.

  • Small US companies are the second-worst performers as they would gain significantly from easier capital access.  

  • Small Canadian companies were the second-best performers. Unlike their larger brethren, their business models do not depend on access to the US market.

The Viridian Capital Chart of the Week highlights key investment, valuation and M&A trends taken from the Viridian Cannabis Deal Tracker.

The Viridian Cannabis Deal Tracker is a proprietary information service that monitors capital raise and M&A activity in the legal cannabis and hemp industry. Each week the Tracker aggregates and analyzed all closed deals and segments each according to key metrics:

• Industry Sector (one of 12 sectors, from Cultivation to Brands)

• Dollar value of the transaction

• Region in which the deal occurred (country or U.S. state)

• Status of the company announcing the transaction (Public vs. Private)

• Deal structure (equity vs. debt)

• Key deal terms (Pricing and Valuation)

The Viridian Cannabis Deal Tracker provides the market intelligence that cannabis companies, investors, and acquirers utilize to make informed decisions regarding capital allocation and M&A strategy.

 Since its inception in 2015, the Viridian Cannabis Deal Tracker has tracked and analyzed more than 2,500 capital raises and 1,000 M&A transactions totaling over $50 billion in aggregate value.

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

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