More States Consider Legalizing Recreational Use of Marijuana. Pot Stocks Are Gaining.
Pot stocks are rising after Virginia came one step closer to legalizing adult-use marijuana last weekend as one of 16 states making similar moves.
Five more state legislatures are actively considering adult-use legalization, according to a survey by Alliance Global Partners. They include Connecticut, Maryland, New Mexico, New York, and North Dakota.
Tilray (ticker: TLRY) climbed as much as 11% on Tuesday. In mid-day trading. Aphria (APHA), which is merging with Tilray, rose 8.4%, Canopy Growth (CGC) rose 4.9%, and Aurora Cannabis (ACB) rose 6.4%. The S&P 500 slipped 0.4% but is up 3.55% this year.
Investors have embraced pot stocks on a surge in revenue in the industry. Tilray’s 2020 sales rose 26% from the prior year, while Aphria’s sales more than doubled. Canopy revenue rose 76% last year.
The ETFMG Alternative Harvest ETF (MJ), a cannabis-focused exchange-traded fund, soared 65% so far this year.
There’s even deal activity in the space. In addition to Tilray’s acquisition of Aphria, Constellation Brands (STZ) has a nearly 40% stake in Canopy. And a company named Parallel plans a public listing by merging with a black check company, Ceres Acquisition.
Parallel’s CEO Beau Wrigley Jr. is a former CEO of WM. Wrigley Jr. Co., the gum company acquired by Mars in 2008. Ceres was co-founded by Scott Braun, an entertainment executive famous for managing Justin Bieber and other acts.
But some analysts wonder whether the sector has become overheated. Tilray shares are up 76% over the last year, while Canopy has nearly doubled. Benchmark analyst Mike Hickey last month cut his rating on Tilray to Hold from Buy, citing the recent run-up.
Last week, Jefferies analyst Owen Bennett cut his rating on Canopy to Underperform from Hold, calling it “too expensive.” Canopy’s multiple is 16.6, compared to the average U.S. company at 5.4, he said.
New Jersey set the tone for the current slate of activity, legalizing adult-use sales earlier this year. Cowen analysts said in a note last month they expect sales to start in the middle of this year.
New York is another big-population state looking at legalizing sales, in part to reap taxes to help cover a budget shortfall. Cowen said despite two previous failed attempts to legalize adult-use sales, “legislative changes around social equity, coupled with Covid-19 budget deficits and legalization in New Jersey will likely get the bill across the finish line.”
Alliance’s research said the 15 additional states contemplating adult-use cannabis would represent 29% of the U.S. population – on top of the 37% of the population now in an adult-use state following Virginia’s bill passage.
Eight other states are contemplating legislation to legalize medical marijuana, including Southern states Alabama, Kentucky, South Carolina, Tennessee, and Texas that have been “traditionally less favorable vs other areas of the country,” the Alliance analysis said.
Pot stocks got a boost last fall when Democrats won the White House and both chambers of Congress, on a belief that national legalization would meet less resistance.
Until that happens, legalization moves forward at the state level. Virginia’s Democrat governor is expected to sign the legislation, which passed 47-44 in the state’s house and 20-19 in the state senate. It would become the 16th state and the first in the South to legalize recreational pot.
“It’s encouraging to see that legislators in so many states are embracing regulation as an alternative to failed prohibition policies,” said Matt Simon, a senior legislative analyst at the Marijuana Policy Project.
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